In addition, he paid fees to accounting consultants and an expert witness.
The taxpayer incurred legal fees to unsuccessfully defend against these charges and unsuccessfully appeal the initial court decision against him. After another shareholder became dissatisfied with the corporation’s performance, the taxpayer was sued for alleged breach of contract, breach of fiduciary duty and fraud. In a PLR, the taxpayer had experience managing closely held companies, and he had agreed to serve as the managing shareholder of a newly formed corporation in exchange for a management fee. But it agreed with the IRS that the legal costs were unreimbursed employee business expenses because they arose from the taxpayer’s business of being an employee (albeit a former employee at the point they were incurred). The taxpayer took her case to the Tax Court. So, if you’re subject to the AMT, these deductions won’t benefit you. Important note: Miscellaneous itemized deductions are disallowed under the alternative minimum tax (AMT) rules. But you’re allowed to combine unreimbursed employee business expenses with other miscellaneous itemized deduction items - such as job search costs, fees for tax advice and tax preparation, and expenses related to taxable investments - when attempting to clear the 2%-of-AGI threshold. This category of deductions can be claimed only to the extent that they exceed 2% of your adjusted gross income (AGI). IRS auditors concluded that the legal expenses constituted unreimbursed employee business expenses, which should be classified as miscellaneous itemized deductions. But she incurred almost $81,000 in legal fees - and wanted to deduct them on her personal tax return as part of the expenses for a business that she and her husband operated. When the employer attempted to recover the bonus, the taxpayer counterattacked, alleging employment discrimination.Įventually, all claims against the employee were dismissed, and she was allowed to keep the bonus. Here, the taxpayer received a $612,000 bonus from her employer before being terminated for alleged breach of fiduciary duty. Summary Opinion 2017-2), an employee who was fired by her employer was allowed to write off legal expenses as a miscellaneous itemized deduction. Tax Court decision and an IRS Private Letter Ruling (PLR) showcase exceptions to the general rule and when taxpayers may be eligible for current deductions for legal expenses. In the latter situation, legal costs usually aren’t deductible right away instead, they may be capitalized and amortized over a number of years if the asset is used for a business or rental activity.Ī U.S. You don’t have to itemize expenses to benefit from above-the-line deductions - and they’re fully deductible under the AMT rules. You can claim “above-the-line” deductions for legal expenses incurred in certain discrimination lawsuits and for attempts to collect whistleblower awards.
Expenses for Certain Discrimination and Whistleblower Claims
Miscellaneous itemized deduction items can’t be deducted under the alternative minimum tax (AMT) rules and can be written off only to the extent they exceed 2% of your adjusted gross income under the regular tax rules.Ģ. However, these types of legal expenses must be treated as miscellaneous itemized deduction items. You can deduct legal expenses incurred for 1) the production or collection of income, such as legal actions to collect unpaid wages and alimony, or 2) the determination, collection or refund of any tax. Expenses for Production or Collection of Income and to Handle Tax Matters But here are two more exceptions to the general rule that may apply, even if the expenses aren’t business-related:ġ. When Can You Claim a Nonbusiness Deduction for Legal Expenses?Īs stated in the main article, an individual’s legal expenses aren’t usually deductible. Instead, they’re most often treated as either personal outlays (which are nondeductible) or as part of the cost of acquiring an asset, such as real estate. Legal expenses incurred by individuals are typically not currently deductible under the federal income tax rules.
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