Facing a lawsuit? Settling an estate? Hiring a lawyer for a business contract or divorce? One of the first questions you’re probably asking is: are legal fees tax deductible?
Short answer: sometimes. The long answer? It depends entirely on why you paid them, who you are (individual or business), and when you paid them.
In this guide, Simplicity Financial unpacks the current IRS rules, how the Tax Cuts and Jobs Act (TCJA) changed everything, and which types of legal fees can still be deducted in California and beyond.
đź“ž Got legal expenses and not sure how they affect your taxes? Talk to Simplicity Financial today for expert guidance.Â
What Legal Fees Are Tax Deductible in 2025?
Before 2018, it was easier to deduct legal fees under miscellaneous itemized deductions. Then the TCJA happened.
The Tax Cuts and Jobs Act of 2017 eliminated most individual miscellaneous itemized deductions subject to the 2% adjusted gross income (AGI) floor—meaning many legal fees for individuals are no longer deductible through 2025.
However, certain legal fees remain deductible if they meet one of the following categories:
âś… Deductible Legal Fees for Individuals
You can still deduct legal fees if they are:
- Related to producing or collecting taxable income (e.g. whistleblower rewards, back pay from discrimination cases)
- Associated with unlawful discrimination claims
- Incurred to obtain taxable alimony (pre-2019 divorces only)
- Paid for tax advice during divorce or estate settlement
- Incurred to resolve federal tax issues (on Schedule C, E, or F income)
🔎 See IRS guidance in Publication 529
Looking for other smart deductions? Check out our guide: Can You Claim Moving Expenses on Taxes?
Are Legal Fees Tax Deductible for Businesses?
Yes—businesses can still deduct ordinary and necessary legal fees under IRS Publication 535.
âś… Deductible Business Legal Fees Include:
- Drafting or negotiating contracts
- Debt collection or breach of contract lawsuits
- Employment law consultations
- Tax advice directly related to business income
- Legal work on business entity formation
These expenses are reported on Schedule C (sole proprietors), E, or F—depending on your business type. If you’re unsure how to categorize these, our startup bookkeeping services can help streamline your records.
đź“Š Need help managing legal costs as part of your business expenses? Learn how our fractional CFOs can help. đź’Ľ
Are Legal Fees Tax Deductible in California?
California generally conforms to federal rules about legal fee deductions. However, California also considered expanding tax relief for consumers through Senate Bill 1377 (SB 1377).
According to SB 1377, consumers involved in lawsuits under specific state or federal consumer protection laws (like the Fair Credit Reporting Act or California’s Consumer Legal Remedies Act) may qualify for above-the-line deductions on legal fees—if income from the case is taxable.
This makes California slightly more flexible than the federal system in some specific consumer law cases.
Not sure whether your settlement qualifies? Check out our California Franchise Tax Payment guide or contact us directly. đź“Ť
What Legal Fees Are Not Tax Deductible?
Let’s cut through the confusion. If you’re asking, what legal fees are not tax deductible, here’s the definitive list from IRS Publication 529:
❌ Non-Deductible Legal Fees (Individuals)
- Divorce legal fees (unless for tax advice or income-related claims)
- Custody legal fees
- Personal injury or civil lawsuit fees
- Will preparation or estate planning
- Criminal defense legal fees (unless business-related)
- Legal fees related to buying or selling your home
- Legal fees for personal reputation protection
- Legal fees in hobby-related lawsuits or claims
If you were wondering:
- Are divorce legal fees tax deductible? No.
- Are custody legal fees tax deductible? No.
- Are legal fees for estate planning tax deductible? No.
- Are criminal defense legal fees tax deductible? Usually not—unless directly tied to your trade or business.
Are Legal Fees Tax Deductible for Criminal Defense?
In most personal cases—no. But there are exceptions:
âś… Deductible if:
- The charges are directly related to your job or business (e.g. defending a tax preparer in a professional misconduct case)
- The case affects Schedule C, E, or F income or involves restitution from a business-related event
You cannot deduct legal fees from a DUI, domestic case, or unrelated personal crime.
đź“‹ Curious how your case affects your taxes? Our tax preparation outsourcing services are designed to review these nuances in full.
Are Legal Fees Tax Deductible in a Settlement?
Yes, but only in specific cases. If your settlement is taxable, you may be able to deduct legal fees up to the amount of taxable income received.
Example:
- You win a discrimination lawsuit and receive $100,000 in taxable back pay
- You paid $40,000 in legal fees
- You may deduct the $40,000 (assuming you qualify under the [IRC §62(e)] unlawful discrimination provisions)
However, if your legal fees were paid in a personal injury case with a non-taxable settlement, they are not deductible.
For more on this, see our article: How Long Should You Keep Tax Returns After Death? —especially useful for estate-related cases.
Are Legal Fees Deductible on Taxes for an Estate?
Not generally. According to IRS instructions for Schedule A, most legal fees for estate planning, including will drafting and probate, are not deductible.
However:
- Legal fees incurred by the estate (not the individual) during administration may be deductible by the estate
- Fees associated with taxable estate income disputes may still qualify
If you’re handling an estate and need bookkeeping help, our outsourced bookkeeping services ensure every dollar is properly categorized and compliant.
Are Legal Fees Tax Deductible for Individuals?
To recap, most individual legal fees are no longer deductible under the TCJA through 2025.
Exceptions include:
- Taxable whistleblower claims
- Discrimination lawsuits
- Certain employment-related cases
- Tax preparation or tax resolution costs
- Legal fees related to income-producing assets (like rental property or royalties)
Want to see if you qualify for deductions? Review your tax bracket with our article on California SDI tax rate limits or average cost of tax preparation by a CPA.
Ready to Sort Out Legal Fees and Tax Deductions? đź§
Navigating what’s deductible and what’s not—especially post-TCJA—isn’t easy. That’s why individuals and businesses across California trust Simplicity Financial to untangle it all.
Whether you’re reviewing a divorce settlement, preparing estate documents, or fighting a business claim, we’ll help you determine if your legal fees are tax deductible, and how to plan ahead.
đź“ž Get in touch now and let us guide you through legal fee deductibility with clarity and confidence.Â
FAQs About Legal Fee Deductibility
Are attorney fees tax deductible?
Yes, if they relate to producing taxable income, running a business, or qualifying legal claims like whistleblower cases.
Are lawyer fees tax deductible for divorce?
No, unless they relate to tax planning or collection of taxable alimony (pre-2019 divorces).
Are legal fees tax deductible in California?
Generally, California follows federal rules. SB 1377 may provide some relief for consumer protection claims under specific conditions.
Are legal fees tax deductible for business?
Yes. If the fees are ordinary and necessary for business, they are deductible on Schedule C, E, or F.
Are estate planning legal fees tax deductible?
No, estate planning or will-related personal legal fees are considered non-deductible personal expenses.
Disclaimer
This article is for informational purposes only and does not constitute legal or tax advice. For case-specific guidance, always consult with a licensed CPA, tax advisor, or attorney. Refer to the IRS’s Publication 529 and TCJA overview for the most accurate information.
