The good news in this tax season is that if you paid estate planning legal fees during 2013, some portion of the legal fees paid might be deductible for federal income tax purposes. Here are some of the basic federal income tax rules.
According to Section 212 of the Internal Revenue Code, “in the case of an individual, there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year - (1) for the production or collection of income; (2) for the management, conservation, or maintenance of property held for the production of income; or (3) in connection with the determination, collection, or refund of any tax.”
What this means is that there may be limited deductions available for some portion of the estate planning legal fee. There should be a clear division noted in the legal fees invoice as to the portion of the fee related to work for the determination, collection or refund of any tax, the portion of the legal fee related to planning to produce or collect income and the portion of the legal fee related to the management, conservation or maintenance of property that is held to produce income. In general, subject to the 2% floor on miscellaneous itemized deductions, the portion of the estate planner’s fee attributable to tax planning should be deductible. Expenses paid for tax “counsel” or paid in connection with any “proceedings” involved in determining the extent of tax liability are generally deductible.
The fee for drafting a Will is not normally deductible for federal income tax purposes. However, the Will may have substantial tax planning significance (for example creating a Charitable Remainder Trust). In such a case, the estate planning attorney could be asked to quantify the amount of time expended for that portion of the legal work related to the tax planning aspects of the Will and provide an allocation of the portion of the legal fee.
Another example of a possible basis for deducting some estate planning legal fees relates to the conservation and management of property. For example, if a Revocable Trust plan is desired and if the Revocable Trust is funded with income-producing property, the Revocable Trust planning might qualify as an arrangement (vehicle) implemented for the management and conservation of property. Depending upon all the facts and circumstances, some portion of the legal fees incurred in preparing and implementing the Revocable Trust might be eligible to be claimed as a deduction for federal income tax purposes.
The bottom line is that some legal fees for certain services provided in the estate planning process might be deductible for federal income tax purposes. Each situation is unique and all the facts and circumstances would need to be evaluated in properly determining and reporting items on your federal income tax return. In order to provide supporting documentation, you may wish to ask your estate planning attorney to describe the services provided in detail and to itemize that portion of the legal fees that might fall within one of the provisions of Section 212 of the Internal Revenue Code. The itemization should be clear as to what portion of the fee is tax counsel and planning; what portion is preparation of documents concerning property, conservation and maintenance and what portion of the fee relates to personal matters. And, as always, seek the advice of your own personal tax advisor who will be most familiar with your situation. The website for the Internal Revenue Service (www.irs.gov) contains useful publications and tax form instructions that should be reviewed in determining whether any portion of the legal fees paid for estate planning services might be deductible for federal income tax purposes.
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