Did you know
that if you met with an estate planning attorney within the past year, some of your
legal fees may be tax deductible?
In both Merians v. Comm’r,
60 TC 187 (1973) (involving estate planning using an irrevocable trust) and
Wong v. Comm’r, TC Memo. 1989-683 (1989) (involving estate planning
using a revocable trust), the Tax Court ruled that twenty percent (20%) of a
non-itemized estate planning bill was deductible as tax advice under Section
212(3).
Attorney’s fees are
deductible only to the extent they exceed 2% of the taxpayer’s adjusted gross
income and they are subject to a phase out when the adjusted gross income
exceeds a certain amount. They cannot be
taken into account in computing the alternate minimum tax. In order to take advantage of the 2% rule,
the client should pay all deductible legal fees in one year.
Attorney’s fees are
deductible to the extent they are incurred:
- to produce income that is includable in the recipient’s gross income;
- for the management, conservation, or maintenance of property held for the production of income;
- in connection with the determination, collection, or refund of any tax;
- to the extent they are paid for tax planning advice.
Expenses, to be deductible
under section 212, must be “ordinary and necessary.” Thus, such expenses must
be reasonable in amount and must bear a reasonable and proximate relation to
the production or collection of taxable income or to the management,
conservation, or maintenance of property held for the production of income.
When deductible, attorney’s fees are treated as “miscellaneous itemized
deductions.”
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