Can You Write Off Lawyer Fees on Your Taxes in Pennsylvania?

When it comes to tax deductions, many people wonder if they can write off lawyer fees on their taxes, especially in Pennsylvania. The answer depends on the nature of the legal services you received. Generally, personal legal expenses, such as those incurred for divorce, personal injury claims, or estate planning, are not deductible. However, there are specific situations where legal fees can be deducted, particularly when they are related to business activities or income‑producing matters. Understanding these exceptions and the rules around them can help you determine whether you’re eligible for a tax break.

What legal fees can be deductible (federal level)

At the federal level (i.e., for your IRS return), legal fees may be deductible if they are incurred in connection with an income‑producing activity, a business, or certain specific kinds of legal situations. Some examples:

Legal fees that are “ordinary and necessary” business expenses (for a trade or business) are generally deductible.
Legal fees tied to rental property (which is treated like an income‑producing activity) may be deductible.
Legal fees incurred in certain discrimination/whistleblower/employee rights cases may qualify as “above‑the‑line” deductions (i.e., not just subject to the old 2% of AGI miscellaneous deduction floor) under certain courts/rulings.

Key things to keep in mind:

If your legal fees are for personal matters (divorce, child custody, personal injury claims for yourself, etc.), they are generally not deductible.
If the legal fees are related to the production or collection of taxable income (or the management of property held for income), then you may have a shot. (See IRC Section 212)
If part of your legal fees are tied to deductible income and part to nontaxable or personal income, you may need to allocate/separate the portion that qualifies.

🇵🇦 Pennsylvania state tax rules

Because you’re in Pennsylvania, it’s important to note how the state handles deductions:

The Pennsylvania Department of Revenue guidance says that Pennsylvania does not allow many of the itemized deductions that are allowed federally. For example: medical & dental, interest, taxes paid, charitable contributions, miscellaneous deductions are not allowed on the PA income tax return.
This means that even if a legal fee is deductible for federal tax purposes, you may not be able to claim a similar deduction when filing your Pennsylvania personal income tax return.

Common scenarios & how the rules apply

Here are some typical legal‑fee situations and how the rules generally treat them in Pennsylvania (with federal implications as well):

Scenario 1: Legal fees for business or rental property

If you incur attorney fees because you’re defending your business, or you are dealing with a rental property dispute, then this can often qualify as a deductible expense at the federal level (as a business expense or a property‑income‑producing expense).
Because Pennsylvania doesn’t allow many of the miscellaneous deductions, you’ll still need to check whether these fees show up differently on your federal vs. PA filing.

Scenario 2: Legal fees for personal matters (divorce, child custody, personal injury)

Typically not deductible. For example: legal fees in divorce proceedings are considered personal expenses.
For personal injury claims: even though the settlement might be tax‑favored (in cases of physical injury), the legal fees may not be deductible unless some portion is taxable and then only that portion of fees may be deductible under allocations.

Scenario 3: Legal fees in employment discrimination / whistleblower / civil rights cases

These may have special treatment: legal fees in connection with certain employment rights/discrimination cases might be deductible “above the line.”

Scenario 4: Legal fees for tax advice/IRS audit

If you incur legal (and accounting) fees for resolving tax issues, that may be deductible for federal purposes (depending on circumstances).

Pennsylvania specific caution

Even if the federal rules allow a deduction, Pennsylvania may not allow it on your PA return because many deductions allowed federally are simply not permitted under Pennsylvania’s personal income tax law.
Always check whether the state treats the expense differently or requires separate reporting.
If you’re claiming a deduction federally, ensure your documentation clearly separates deductible vs nondeductible portions of attorney fees: what services the attorney provided, which matter they relate to, etc.

Practical checklist before you claim

Here’s what you should do before attempting to claim attorney fees as a deduction:

Identify the nature of the legal fees.
Ask: Are they tied to my business/trade/rental property/income producing activity? Or are they personal (divorce, custody, personal injury, etc.)?
Check the federal rules.
See whether under federal tax law the fees are eligible. If it’s a business/rental/income‑producing case or discrimination/employment case, you may have eligibility.
Check state rules (Pennsylvania).
Recognize that PA may not allow the deduction, or may have different rules. If you claim federally, you still need to see how they treat it at the state level.
Allocate if mixed.
If part of the legal fees are deductible and part are not (e.g., some legal advice for tax purposes vs personal legal advice), get your attorney to break out invoices or segregate services by category. This helps substantiate your deduction.
Keep detailed records.
Maintain invoices, attorney engagement letters, a description of the nature of the case and how it relates to income or business, and how much of the fee is allocable to each service type.
Consult a tax professional.
Because both federal and state tax law in this area can be complex (and state laws vary), it’s wise to talk to a CPA or tax advisor—especially if the amounts are significant.

Summary

Federal: Legal fees may be deductible if tied to business, income‑producing property, managing/collecting taxable income, or certain employment/discrimination cases. Personal legal fees (divorce, child custody, etc.) generally are not deductible.
Pennsylvania: Many of the federal itemized deduction types (including miscellaneous/legal fees) are not allowed; so even if federal allows it, you may not get a similar benefit on your PA tax return.
Always check both levels (federal + state) and determine exactly how your attorney fees relate to the services and whether they fall into a deductible category.
Documentation and correct allocation matter a lot.

FAQ (Frequently Asked Questions):

1. Can I deduct lawyer fees on my taxes in Pennsylvania?

Federal: Yes, you can potentially deduct legal fees if they are related to your business, rental income, or specific employment-related cases, such as discrimination or whistleblower cases. Personal legal fees (e.g., divorce, child custody) are generally not deductible.
Pennsylvania: Unfortunately, Pennsylvania does not allow many federal itemized deductions, including legal fees, to be deducted at the state level. So, even if you can write off legal fees federally, they may not be deductible on your Pennsylvania tax return.

2. What types of legal fees are deductible on federal taxes?

Legal fees that are incurred for business or income-producing activities (e.g., defending your business or property).
Legal fees related to discrimination, whistleblower cases, or certain employee rights lawsuits.
Fees for legal advice regarding tax issues, IRS audits, and legal costs tied to rental property income.

3. Are legal fees for divorce or personal injury deductible?

Divorce: Legal fees associated with divorce proceedings are not deductible on either your federal or Pennsylvania taxes.
Personal Injury: If you’re receiving compensation for personal injuries, legal fees are generally not deductible, unless the settlement is taxable.

4. What should I do if part of my legal fees relate to business and part to personal matters?

If your legal fees are a mix of business and personal, you will need to allocate the portion that is tied to business activities or income-producing activities. Only the portion related to your business or income-generating activity will be deductible.

5. How do I claim lawyer fees for business or rental property on my taxes?

You can claim legal fees related to business activities or rental property on your federal return as ordinary and necessary business expenses. However, Pennsylvania does not allow these types of deductions on the state return, so be sure to consult a tax professional to understand how they should be reported.

6. Can I claim legal fees for employment-related lawsuits?

Yes, you may be able to deduct legal fees related to employment-related lawsuits such as discrimination, harassment, or whistleblower cases under federal tax law. These may qualify as deductions under special rules and could be eligible to be claimed above the line, meaning they might not be subject to certain floors or limitations. However, check with a tax professional to confirm.

7. How does Pennsylvania treat legal fees compared to the federal government?

Pennsylvania follows a much stricter rule when it comes to deductions. Many legal expenses that are deductible at the federal level are not deductible for Pennsylvania state taxes. This means that while you may be able to write off legal fees federally, Pennsylvania will generally not allow similar deductions.

8. Do I need special documentation to claim legal fees on my taxes?

Yes, it’s important to maintain thorough records and documentation, including:

Invoices and billing statements from your attorney.
A description of the case and how the legal fees are related to income or business activities.
If the fees are mixed (business vs. personal), you should break them down clearly and ensure you’re only claiming the deductible portion.

9. Can I deduct lawyer fees related to tax advice or IRS audits?

Yes, if your legal fees are related to tax advice or the defense against an IRS audit, they may be deductible on your federal return. Be sure to check how they apply to your situation, as the fees need to be directly tied to tax matters.

10. Should I consult a tax professional?

Yes, given the complexities of tax law regarding legal fees (and especially the differences between federal and state rules), it’s always a good idea to consult a CPA or tax professional. They can help you determine which fees are deductible and ensure that you’re in compliance with both federal and state tax laws.

Can you write off lawyer fees on your taxes in Pennsylvania?