When a loved one dies, a taxpayer may end up incurring certain legal fees in order to fully and properly settle the deceased’s estate. Given that this estate settling often results in the receipt of some or all of the estate proceeds, many taxpayers often wonder if these estate-related legal fees are deductible on their individual income tax returns. Unfortunately, these fees are very probably not deductible.
Per the IRS’s Publication 529, “you can deduct legal fees related to doing or keeping your job.” Per that same Publication, “you can deduct the ordinary and necessary expenses that you pay:
1. To produce or collect income that must be included in your gross income,
2. To manage, conserve, or maintain property held for producing such income, or
3. To determine, contest, pay, or claim a refund of any tax.”
In other words, legal fees are deductible on individual income tax returns if they are job-related, or if they are related to taxable income or tax.
Of course, estate-related legal fees are not related to doing or keeping your job, and since inheritance proceeds are not taxable to the recipient (with the exception of retirement accounts, which are typically set up to bypass the estate altogether), estate-related legal fees are generally completely unrelated to taxable income or tax.
Moreover, the Schedule A instructions include a list of “Examples of Expenses you Can’t Deduct.” One such example is “legal expenses for personal matters that don't produce taxable income”.
Given the generally nontaxable nature of inheritances and the personal nature of estate settling, personal payment of estate-related legal fees is almost certainly nondeductible on the individual level.
It is possible, however, that the fees may be deductible to the estate against its estate tax or its income tax. If you are involved with a taxable estate, if you are involved with an estate that holds a retirement plan, or if you have any other specific questions about an estate that you are involved with, you should contact Fusion CPA.
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