Attorney fees for a personal legal case are generally not tax deductible. However, there are a few exceptions to this rule. If the fees charged by your lawyer stem from a business-related case, you might be able to write them off. This is true for many types of businesses, including rental properties.
If you are considering working with a personal injury lawyer on your case but have concerns about the expenses, tax deductions, and other costs, you should speak to the attorney or talk to a trusted tax accountant.
- When Are Attorney Fees Deductible?
- What Are You Taxed on After a Personal Injury Case?
- Discuss Your Options With Your Attorney, Including Their Fees
- Work With an Accountant or Tax Professional
- Learn More About Our Legal Team Today
When Are Attorney Fees Deductible?
Generally, when you pay an attorney a contingency fee, you cannot deduct the fees as a write-off. This is common in personal injury, wrongful death, and other negligence cases. It could also occur in employment law, whistleblower, and civil rights cases. In these three examples, you might be able to consider the fees a tax deduction. Again, it is prudent to consult with an experienced tax accountant before committing to a specific treatment on your tax returns.
You are generally able to write off attorney fees when they are a business expense. These are not normally contingent fees, but they could be in some cases. They are often flat rates or hourly fees, or you paid a retainer to cover the cost and paid more as the retainer ran out.
Attorney fees are common in some industries, and many businesses write them off every year as an expense. Consider, for example, a business that relies on contracts or a company that owns numerous apartment complexes and regularly deals with eviction proceedings.
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What Are You Taxed on After a Personal Injury Case?
When a personal injury plaintiff receives a payout, the attorney receives a portion of the compensation as their attorney fee. While you are generally only taxed on your income, some plaintiffs must pay additional taxes after a settlement or court award. According to Forbes, some plaintiffs in contingency fee cases pay taxes on their gross payout. This includes the percentage they never see because it is paid directly to their attorney.
Many do not realize that attorneys are paid directly from the plaintiff’s settlement check or payout. The check goes to the attorney, who takes their agreed-on percentage and sends the rest to the client. When tax time arrives, the IRS expects them to pay taxes on the gross, not the net. This seems unfair to many since the net is the income they received.
For example, imagine your attorney charges 30 percent of the recovery. Then:
- They negotiate a $100,000 settlement for you
- The insurance company cuts a check for $100,000
- Your lawyer takes their $30,000 and they forward you $70,000
Under a 2005 case law, Commissioner v. Banks, 543 U.S. 426, plaintiffs must consider 100 percent of the payout as income on their taxes. This is true even when the lawyer is paid directly, and the client never sees the remaining money.
Discuss Your Options With Your Attorney, Including Their Fees
While there might not be a way to avoid paying taxes on your attorney fees in most personal injury cases, you should ensure you understand as much as possible about your fees and the possible implications of your recovery. The best option is to discuss fees, fee structures, and how the process works with your personal injury lawyer early in the process.
When it comes to personal injury cases, most lawyers work on a contingency-fee basis. This type of fee structure does not charge upfront fees and they do not track hours. Instead, your contract states an agreed-on percentage of the total payout. Your attorney receives a portion of the compensation they recovered for you.
Other fee structures include:
- By the job
Many law firms handling other types of cases might ask for a retainer. This is common for attorneys working hourly. They obtain cash upfront and use it to cover case costs and their hourly fees until it runs out. When this occurs, you will need to pay more to cover any upcoming legal needs.
In either of these situations, understanding how the attorney’s fee structure works and how much the case might cost you from the beginning is a good idea. Your attorney should be able to at least provide an overview or general idea of their structure, rate, and how this process works during your first discussion with the firm.
You want a lawyer you feel comfortable discussing difficult topics with. Do not be afraid to ask about their attorney fees and other financial topics during your initial consultation.
Work With an Accountant or Tax Professional
If you are pursuing personal injury compensation or have another legal case where you might recover a significant sum of money, you should discuss your options with an accountant or tax professional. They are well-equipped to analyze your options and ensure you file your taxes correctly. Taxes after legal recovery are often complex.
They will also work with you if you have deductible attorney fees, such as fees for a business or those that have special rules under the tax code. Some of these require special knowledge of the law to navigate deducting the fees.
By working closely with your accountant and ensuring they have documentation of your payout when they prepare your taxes, you might be able to reduce your tax burden. They could find other write-offs or know how to apply other rules to reduce how much you must pay.
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Learn More About Our Legal Team Today
At Friedman & Simon, L.L.P., our personal injury lawyers are passionate advocates for the injured. We handle a wide range of negligence cases, including traffic accidents, wrongful death, birth injuries, construction accidents, dog bites, medical malpractice, nursing home abuse, premises liability, and falls. We offer free initial consultations for victims.
Call for a free case assessment or use our online contact form to connect with our team today.