Are Attorney Fee's Tax Deductible?

Let's Talk About.....Are Attorney Fee's Tax Deductible?
By Alan Orlowsky

If you haven't been there yet, and without jinxing your luck, the odds are good you're going to need legal advice some day. Maybe you're thinking about a divorce, or you need help writing a will or setting up an estate trust. Regardless of why you need an attorney, you're going to have to pay for the lawyer's legal services. Can you take a tax deduction for those attorney's fees? Usually not, but there are some exceptions.

General Rules

The general rule is simple enough: You can deduct attorney's fees you pay for:

• ·     Trying to produce or collect taxable income
• ·     To help in determining, collecting or getting a refund of any tax

In simple terms, you can take a deduction if you need an attorney's help to make money you have to pay taxes on, or if an attorney helped you with a tax matter, like representing you in an IRS audit. If the legal fees are somehow connected to taxes or taxable income, you can take a deduction.

Is There a Deduction?

There are all kinds of situations that qualify for the tax deduction, such as fees you may pay for:

1. ·     Tax advice you may get during a divorce case, such as how you and your ex-spouse will take deductions for home mortgage interest or child care, or whether alimony is tax deductible by the payor spouse or taxable income to the recipient spouse
2. ·    Trying to get your ex-spouse to pay past-due alimony
3. ·    Defending a lawsuit filed against you on work-related matter, such as an unlawful discrimination claim filed by a former employee that you fired
4. ·     Receiving your share of a class action settlement in a lawsuit against your employer or former employer. For example, your former employer settles a class action claiming that it didn't pay overtime wages. You get a $1,500 check for your share of the settlement, but $2,000 is reported to the IRS as income because you're charged $500 as your share of attorney's fees. Because the income is work-related, you can take a tax deduction for the $500 in fees

Generally, you can't deduct fees paid for advice or help on personal matters or for things that don't produce taxable income. For example, you can't deduct fees for:

• ·    Filing and winning a personal injury lawsuit or wrongful death action - the money you win isn't included in your gross income and so it's not taxable
• ·     Settling a will or probate matter between your family members
• ·     Help in closing the purchase of your home
• ·     Defending you in a civil lawsuit or criminal case that's not work-related, such as defending you on a drunk driving charge or against a neighbor's claim that your dog bit and injured her child

How and How Much?

Generally, you deduct attorney's fees as an itemized miscellaneous deduction on Schedule A of your Form 1040 tax return. You may not be able to deduct all of your fees, though. Miscellaneous deductions are limited by the two percent rule: You can deduct only the amount of your miscellaneous deductions that's more than two percent of your adjusted gross income (AGI) - the amount you entered on line 38 of your 1040.

Have a Business?

As a business owner, you can take a deduction for the same things discussed above. If you pay an attorney to prepare your taxes or to help the business make money, you can deduct the fees. For example, you can deduct fees paid for:

• ·    Collecting money that's owed to you by a customer
• ·     Defending you or an employee in a lawsuit over a work-related claim, such as a discrimination lawsuit filed by a former employee
• ·     Negotiating or drafting contracts for the sale of your goods or services to customers

Also, you can usually deduct attorney fees you paid in connection with starting up your business or buying an existing business. Generally, you deduct these business-related expenses the same way you deduct other ordinary and necessary business expenses. You need to file Schedule C with your 1040 tax return.

Check with Your Lawyer

If you're concerned about whether you'll be able to deduct attorney's fees, you can always ask your attorney - before they do any work for you - and if any of the fees they charge are tax deductible.

Also, ask your attorney to prepare a billing a statement that shows clearly what part of her fees is deductible. So, for example, if you're involved in a divorce, your lawyer's billing statement should show how much time she spent working on how the divorce will impact your taxes. It should be separate from the other non tax divorce issues, like the time spent drafting the divorce papers.

If you have questions about this post or about a particular legal situation, please contact Alan Orlowsky by calling 847-325-5559 or visit our website at http://www.orlowskywilson.com

Going to Tax Court

Let's Talk About.........Going to Tax Court
By Alan Orlowsky

Did you receive a nasty tax bill after your IRS audit? Have you been served with an IRS notice of deficiency? You may not agree with the bill. You may also not be able to afford the payment. What should you do? Going to the US Tax Court is always an option.

US Tax Court

The US Tax Court is a special federal court. It only decides tax cases between taxpayers and the IRS. The judges travel around the country to hear cases. They're experts in tax law.

Is the IRS claiming you owe $50,000 or less in any particular tax year? You can file an appeal of your audit results with the Small Cases Division of the US Tax Court. It's similar to a small claims court. It doesn't matter if the entire tax amount is over $50,000. The case can be heard as long as it's not more than $50,000 in a single year.

Did you lose your appeal in the Small Cases Division? You can't appeal any further. You're stuck with the amount the court says you owe. However, most tax court cases are settled without even having to go to a trial. Many taxpayers walk away with substantial reductions in the amount of taxes, interest and penalties owed.

Filing an Appeal

The best place to find instructions and forms for filing an appeal are found on the US Tax Court web site. There's a $60 filing fee. It must be sent in at the same time as the filing paperwork.

You must file the appeal paperwork with the US Tax Court within 90 days of the date the IRS sent the Notice of Deficiency to you. You'll get to choose the IRS court where you'd like the trial to take place. There's at least one US Tax Court in every state.

It's a good idea to be as specific as possible in your paperwork. Explain in detail about why you disagree with the IRS's claim that you owe money.

You'll have the opportunity to try to settle your case ahead of time. There are many more cases filed than the IRS has legal staff to take to trial. It's best to approach any settlement talks with an eye toward specific issues. This method is better than trying to negotiate an overall reduction in the amount owed.

Trial Procedures

The hearings in the US Tax Court usually don't last very long. You'll have the chance to tell a judge your side of the story. The burden of proof is on you to prove that the determination of the IRS is incorrect. You can bring financial paperwork to back up your position. You can also call witnesses.

You'll receive the opinion in the mail. You may appeal the decision in a regular tax case to one of the US Courts of Appeal. You must file a notice of appeal within 90 days of the decision.

If you have questions about this post or about a particular legal situation, please contact Alan Orlowsky by calling 847-325-5559 or visit our website http://www.orlowskywilson.com