In the not-so-distant past, individuals could deduct legal fees as miscellaneous expenses on their personal returns if certain requirements were met. That is no longer the case. However, as evidenced by a new Tax Court decision, Rosso, TC Memo 2025-115, 11/6/25, payment of fees relating to some types of legal actions may still be deductible.
Background: Prior to the Tax Cuts and Jobs Act (TCJA), individuals were allowed to deduct miscellaneous expenses in excess of 2% of adjusted gross income (AGI) if they itemized on their personal returns. This included qualified legal fees incurred for the “production of income” plus unreimbursed employee business expenses. For example, if your AGI was $100,000 and you incurred $2,500 in legal fees and $1,000 in other miscellaneous expenses (e.g., tax advisory fees) for a total of $3,500, your deduction was limited to $1,500.
However, the TCJA suspended all miscellaneous deductions for 2018 through 2025 and now the One Big Beautiful Bill Act (OBBBA) has permanently eliminated them. Under the OBBBA, your deduction is zero, regardless of your AGI. Nevertheless, personal legal fees may be deducted in certain other situations.
Facts of the new case: The taxpayer, a resident of California, was a party to several lawsuits in 2012, including a real estate partition suit and a professional negligence and breach of contract action. On her Schedule A for 2012, she claimed a miscellaneous deduction of $31,070, comprised of $410 for tax preparation fees, $600 for telephone expenses, $1,575 for office and meals expenses and $28,485 relating to legal expenses. The IRS disallowed virtually of the miscellaneous expense deduction.
When the case went to the Tax Court, the taxpayer had little evidence on her side. She failed to substantiate any part of the $28,485 in legal fees as production-of-income expenses. Thus, they were treated as purely personal expenses. Accordingly, the Tax Court had no choice but to deny her claim and tack on penalties and interest.
Under current law, you may be able to deduct legal fees relating to discrimination lawsuits, such as employment claims for wages, compensation or benefits, attorney’s fees relating to whistleblower awards and defending yourself in a “slip and fall” case initiated by a tenant of a building you own. But legal fees attributable to the purchase of real estate are nondeductible and must be added to the property’s basis instead.
Tax review: Check with your clients about their reasons for incurring legal fees. If you aren’t vigilant, some deductible expenses may fall in between the cracks.
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