Are Estate Planning Legal Fees Tax Deductible?
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June 18, 2019
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Whenever tax season kicks off into gear, many of us look for ways to reduce our tax liability. Some, but not all, attorney fees are eligible for deduction. It depends on the type of legal service you sought. For instance, hiring an attorney for a child custody dispute or a personal injury case are both ineligible expenses. Legal expenses related to a business, such as collecting unpaid debt, are qualifiable.
Examples of Tax Deductible Legal Fees
Business-related expenses such as seeking advice for a startup business
Rental property expenses such as fees paid to evict a tenant
Employment discrimination cases
Examples of Non-Deductible Legal Fees
Personal injury cases including workers compensation
Criminal cases
Estate planning disputes
As they relate to estate planning, the IRS will allow you to claim certain legal fees but not all. As you can see from the last example, legal costs relating to disputes between family members are not tax deductible.
What Does the IRS Say about Deducting Legal Fees for Estate Planning
The IRS discusses Miscellaneous Deductions under Publication 529. Estate planning fees, including all other legal expenses, qualify under the miscellaneous category.
For example, if you have a living trust that generates income, any legal fees associated with the maintenance and preservation of your trust are tax deductible.
An example of an income generating trust would be one that includes rental property. Therefore, any legal fees associated with the management of your rental property are qualifiable. In addition, your trust may hold other non-real estate assets that generate income.
Examples of these would include:
Royalties paid to you
Businesses
Dividend-paying stocks
Certificates of Deposit (CDs)
Savings accounts
Legal fees you pay toward the preparation of filing taxes for a trust are also eligible for deduction. These fees could relate to collection or refund of estate taxes.
Estate planning fees that are not tax deductible would be legal advice about the creation of a trust or issues that relate to the transfer of property. For example, if you seek legal advice that relates to transferring your residential home into a newly created trust as a way to avoid probate, this would qualify as a personal expense.
Other estate planning instruments that don’t qualify for deductions would include healthcare directives, powers of attorney, and guardianship designations.
How To Claim Your Estate Planning Legal Fees on Your Taxes
Attorney invoices include a list of services rendered throughout the course of service. You might get several invoices periodically, depending on the length of time you worked with your attorney.
Some attorney services are tax deductible, while ones that are not are considered personal expenses.
Your attorney can inform you about which services were related to taxes or for the management of income generating activities, such legal advice about your business.
It also doesn’t hurt to double check with a tax professional about which of your legal expenses are tax deductible.
You may claim your legal expenses on Schedule 1 Form 1040 as miscellaneous deductions. It is essential to point out that the IRS has a 2% rule on miscellaneous deductions, meaning that they will deduct 2% from your adjusted gross income.
All of your deductions on your tax returns count toward adjusting your total income. For example, if your total gross income for the year totals $100,000 and the total amount of your deductions equal to $10,000, your adjusted gross income (AGI) is $90,000.
Now let’s assume that $3,000 of your miscellaneous deductions were all estate planning legal fees. The IRS would deduct 2% from your total AGI of $90,000, or $1800. This means you can deduct $1,200 of the $3,000 paid in legal fees ($3,000 – $1,800 = $1,200).
While not every legal fee you pay counts as an eligible deduction, the good news is that many of them can help ease your tax burden. This is good news for anyone concerned with how much they will have to pay an estate planning attorney in legal fees.
Always consult with an attorney and tax professional about which expenses you can claim on your tax return.
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