When are attorney's fees tax deductible?

When are attorney's fee tax deductible? Are attorney's fees a tax deduction? Listen as Attorney Tom Olsen and Dave McCarron answer these questions and more! 

Attorney Tom Olsen: So then, Dave, let me tell you something that's close to my heart and that is that often, when I am done with clients and it's time to talk about fees and the payment they'll say, "Tom, is it tax deductible?" I'd love to tell them legal fees are tax deductible but when are they and when are they not?

Dave McCarron: Exactly. Legal fees can be tax deductible if they are incurred in order to generate income, to protect your income, or to protect your assets.

Attorney Tom Olsen: Alright.

Dave McCarron: So when you look at estate planning, if you're looking at a will or a trust, a portion of that purpose is to protect those assets, those income generating assets. So some of those fees could be tax deductible.

Attorney Tom Olsen: Well, I like to hear that but break that down for me again. There are three situations where legal fees may be tax deductible. Tell me again.

Dave McCarron: Correct. If you are incurring those fees to generate additional taxable income.

Attorney Tom Olsen: Tell me what that would be.

Dave McCarron: For example if you were in a law suit in order to collect lost wages, back wages, employment related lawsuits, when you get paid that judgment you're going to get taxable income. 

Attorney Tom Olsen: Got you. I can understand that.

Dave McCarron: The other is if you are protecting income generating assets. A lawsuit to protect rental property, for example, or to go after a tenant, you're actually going to be generating taxable income through that law suit so those are tax deductible.

Attorney Tom Olsen: Got that.

Dave McCarron: And the third one is in the area of estate planning for doing a will or a trust, possibly, some of that is going to be related to taxable assets.  For example, if you're doing an estate planning for a rental property that you have in your estate and you want to protect that for your heirs, some of those legal fees that are going to be prorated for from your total bill are going to be tax deductible.

Attorney Tom Olsen: Okay, but a traditional simple will for somebody, any tax deduction there for them.

Dave McCarron: For example, if they own a small business, for example, if they just have a retirement plan and a house and a pretty simple estate they’re probably not going to be tax deductions.