Marital actions. As a general rule, attorney’s fees in marital and custody actions are not deductible. This is so even if marital assets include a business or investment property. If legal fees are for tax advice, they are deductible. Also, legal fees paid to protect a certain asset may be added to basis. It is important for the attorney to separately bill for such services. Child support and property settlements incident to a divorce are non-taxable, so related attorney’s fees are nondeductible. Loophole: In the case of a spouse who pays attorney’s fees to secure alimony, the fees are deductible, since the alimony is taxable.
Social security claims. Attorney’s fees to establish a claim to Social Security benefits, (e.g., to qualify for disability payments) are deductible to the extent that the benefits are taxable. Depending on income, up to 85% of benefits may be taxable – so that portion of the fees may be deductible as a miscellaneous itemized deduction.
Criminal actions. Generally, attorney’s fees to defend oneself in a criminal matter are not deductible. For example, fees to mount a Racketeer Influenced and Corrupt Organizations (RICO) Act defense are not deductible even if an adverse determination results in forfeiture of property under the law. However, if the case arises in a business context, the fees may be deductible.
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