Are Legal Fees Tax Deductible on a 1040?

Legal fees add up quickly regardless of the type of suit. You can deduct fees sustained for representation if you’re seeking taxable income through the litigation. Generally, the Internal Revenue Service requires individuals to deduct eligible legal fees on IRS Form Schedule A, and attach the schedule to the 1040 return.

Schedule A -- Itemized Deductions

Amounts claimed on Schedule A are used to reduce a taxpayer’s taxable income. If you file Schedule A, you’ll want to make sure your total deductions equal more than the IRS standard deduction for your filing status. For example, in 2009, the IRS standard deduction for married filing joint taxpayers was $11,400. If your itemized deductions in 2009 were less than $11,400, it would not be beneficial to itemize your deductions. However, there are multiple deductions you can take on Schedule A aside from legal fee costs, such as mortgage interest and property tax.

Income-Producing Legal Fees

You can only deduct fees associated with legal proceedings to produce taxable income. Generally, allowable fees include those incurred to keep your job or defend a criminal position that could hinder your ability to conduct business. Fees for family law cases are not deductible unless the charges are related to taxable alimony collection, or tax advice relative to divorce. Child support is not taxable income, so you can’t deduct legal fees incurred for support collection. Most other forms of personal legal expenses cannot be deducted, including fees paid for custody cases, divorce settlements and personal injury damages.

Deduction Limitations

Deductions for legal fees claimed on Schedule A are subject to a 2 percent adjusted gross income limitation. This means that you can take a deduction for the amount of legal fees that exceed 2 percent of your income. For example, if your adjusted gross income equals $100,000, your legal fees must equal more than $2,000 to take a deduction. Additionally, the amount you can deduct is equal only to the amount over the 2 percent threshold. If your legal fees totaled $2,500 in the example above, then your deduction is $500.

Business Legal Fees for Self-Employed Individuals

If you’re self-employed and have business related legal fees, you can deduct the costs on Schedule C, Profit or Loss from Business. Expenses claimed on Schedule C are subtracted from your gross business income. Unlike the deduction on Schedule A, your legal fee deductions on Schedule C aren’t subject to percent limitations. Profits or losses from your Schedule C business activity are reported on your 1040.