Legal Expenses for Self-Employed Taxpayers

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  Self-employed taxpayers may deduct legal expenses pertaining to start-up, operation and management of their business by claiming these expenses on IRS Form 1040 Schedule C, Part II, Line 17. These deductions may include attorney representation in litigation relative to operation of the business, as well as consultations on business planning and employee relations.
  
  

Legal Fees for Business Capital Assets

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  Legal fees related to capital asset acquisition are not allowable as tax deductions. These legal expenses are incorporated into the basis for that asset, which helps to offset capital gains tax consequences upon the later sale of that asset.
  
  

Personal Legal Expenses

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  Most personal legal expenses, such as divorce-lawyer fees, are not tax-deductible. The expense of criminal defense is also not deductible. However, attorney fees relative to the collection of taxable income, such as pursuing a judgment that is taxable on receipt, are deductible as a miscellaneous expense on IRS Form 1040 Schedule A if the taxpayer elects to take itemized deductions rather than the standard deduction. Most Schedule A deductions are subject to a floor of 2 percent of the taxpayer's adjusted gross income, and the IRS also puts a limit on the deductions that may be claimed by taxpayers with relatively high incomes. These limits change annually; taxpayers should consult a tax practitioner or the current IRS publications to determine appropriate deductions at the time of filing.
  
  

Real Estate Legal Fees

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  Personal real estate-related legal fees are not tax-deductible. As with legal expenses related to capital assets, these fees are incorporated into the basis of the real estate. Legal expenses relative to the maintenance and management of income-producing real estate holdings, such as designing rental contracts or creating a real estate holding company, are ordinarily deductible as business expenses relative to the income generated by that real estate.
  
  

Legal Fees for Adoption and Employment

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  Legal fees related to the adoption of a child may be incorporated into the total expenses allowable under the Child Tax Credit. The amount allowable under this credit changes annually. To claim this credit, taxpayers must complete IRS Form 8839, attach it to IRS Form 1040, and claim the credit on Form 1040 line 51. Legal fees related to seeking and maintaining employment, such as relative to job discrimination, workplace hazards, or employment contracts or termination, are deductible as Schedule A miscellaneous deductions subject to the IRS-set floors and income caps.
  
  

Warning

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  Tax laws change annually. To avoid liability, or even criminal charges, for tax fraud, as well as to maximize all available deductions for legal expenses and any other allowable deductions, taxpayers should consult a knowledgeable tax preparer or tax attorney.