Are Estate Planning Fees Tax-Deductible?
Ah, the Adjusted Gross Income. The AGI. It is the magic number on your tax forms, which determines your tax bracket and the amount you owe in federal and state taxes. We all want to reduce our tax liability, of course. Creative CPAs and tax attorneys have many suggestions on what we can deduct, what we can write off, and how we can appear — on paper — to earn less money every April.
What about legal fees we incur during the year? Are these fees tax-deductible? And specifically, what about the charges associated with estate planning?
There are subtle distinctions that the Internal Revenue Service draws between various types of legal expenses. Different types of legal advice are either allowable as deductions or not.
Here are some legal fees that you are NOT allowed to deduct:
- Fees for workers compensation cases, including any fees used to get a claim approved
- Fees related to personal injury cases, including preparation to file suit against another driver in the case of a collision
- Criminal defense costs, not limited to but including DUI and drug-related offenses
- Estate planning disputes, e.g. if you are a beneficiary and are contesting a will against another beneficiary, the costs associated with these disputes are not tax-deductible.
Which legal fees can you deduct?
There are other types of legal fees which you can legally deduct:
- Fees involving cases of employment discrimination, including discrimination for gender, age, religious affiliation, sexual orientation, or maternity
- Fees related to the management of rental properties, including the costs associated with the eviction of tenants
- Fees related to your business, such as legal advice related to a business you are starting
- Tax-related legal advice, such as advice related to contesting, claiming a refund on, or paying off any tax bill
- Fees involving keeping your job or doing your job, e.g. a criminal charge resulting from your employment
Those legal cases are delineated clearly. Some other types are not as clear.
Some expenses related to the advice of attorneys can be written off under the “miscellaneous” category. Granted, a miscellaneous deduction may not be the best place for a large expense. Some tax professionals try to avoid filing large expenses as miscellany, and try to focus deductions on specific categories and identifiable line items.
However, with that in mind, it may be worth writing off your payments to law offices in this category.
There are some Miscellaneous Deductions that you can apply toward estate planning under the IRS form called “Publication 529.”
If you have a living trust which generates income, and you seek legal advice toward protecting the assets of that living trust, that advice can be deducted as a miscellaneous deduction.
If you seek legal advice regarding taxes on a trust – collecting or refunding estate taxes, for example – you can deduct these legal fees as miscellaneous deductions.
However, the process of creating a trust is not deductible. If you are trying to avoid probate by transferring your residential property to a trust, that is not eligible for deduction.
If you have questions regarding what is eligible for deduction and what is not, we recommend seeking professional advice. There can be what may appear to be “grey areas” in legal advice, and what constitutes a miscellaneous deduction on your Schedule 1 Form 1040. A tax professional can answer this for you. An estate planning attorney can answer this for you as well.