Desktop: Deductible Attorney Fees

Are attorney fees deductible? 

It depends. For business returns, attorney fees suffered by a business for business purposes are normally treated as tax deductible expenses. 

For personal tax returns: Before the Tax Cut and Jobs Act (TCJA), the attorney fees were deductible as miscellaneous itemized deductions that were subject to the 2% limitation. Section 111045 of the TCJA however suspended most Miscellaneous Itemized Deductions which are inclusive of most attorney fees, through to 2026. 

On Schedule 1, allowable attorney fees are included as income adjustments. In the event that a taxpayer receives an award for a claim (1099-MISC Box 1) and there was a deduction of the attorney fees (1099-MISC Box 10), then the fees will be deductible provided that they were paid in the very year of the award. Make sure that the gross proceeds are included in Box 1, i.e. attorney fees are included in Box 1. 

Personal legal fees that are deductible: 

• Discrimination claims 
  • Employment 
  • Civil rights 
• Some whistleblower claims;
  • Section 62(a)(21) of the Federal Whistleblower statute IRC permits the deduction of legal fees spent in connection to a federal tax whistleblower action whose end product is an award from the IRS. 
  • Section 62(a)(20) of the I.R.C provides that actions filed under the Federal False Claims Act may be eligible for an above-the-line deduction of legal fees. 
  • A whistleblower from the SEC or the Commodity Futures Trading Commission who receives an award from either the SEC or CFTC programs is allowed to claim, as an above the line deduction, the attorney fees. 

When attorney fees are deductible, they are deductible … 

• Only in the event that they are paid in the same year that the recovery of claims is paid. 
• They are not more than the amount of recovery. 

Personal legal fees that aren’t deductible: 

The following legal fees, among others, are not deductible; 

• Children custody 
• Suit for breach to marry 
• Civil or criminal charges that result from a personal relationship 
• Preparation, defense or perfection of a title 
• Preparation of a will 
• Property settlements or claims in divorce, regardless of whether it leads to the loss of income producing property
• Legal fees in connection to the production or collection of taxable income or getting tax advice
• Damages for personal injury (this does not however apply to some whistleblower and unlawful discrimination claims) 

To enter attorney fees in the Taxx Savage Pro: 

• Go to the Main Menu of the tax return (Form 1040) 
• From the menu, select Adjustments 
• Then Other Adjustments 
• Proceed to Other Adjustment #1, #2, etc - Select either WBF (Whistleblower award) or UDC (unlawful discrimination claims).

Note: There is no miscellaneous adjustment as the list of allowable other adjustments is complete. 

Reminder: It is mandatory that the gross value of the total recovery (awards for claims) be part of income regardless of the taxpayer being permitted to claim attorney/legal fee against the award. All rewards are to be reported at gross value, not net value. 

Additional Information:

IRS: Publication 525, Taxable and Non-taxable Income

IRS: Publication 529, Miscellaneous Deductions