Can You Deduct Lawyer Fees for Wrongful Death? + FAQs

Yes, but only under specific conditions and depending on the type of tax return and case context. Roughly 33% of a wrongful death settlement typically goes to attorney fees.

It’s no surprise that families often wonder if those hefty legal bills can be written off at tax time. Losing a loved one is hard enough – a surprise IRS bill on top of legal costs can feel overwhelming. This comprehensive guide breaks down exactly when you can deduct wrongful death legal fees and when you can’t, covering federal laws, state differences, personal vs. business vs. estate scenarios, and more.

💼 Federal vs. State Laws – Understand how IRS rules differ from state tax laws when it comes to legal fee write-offs.
🔍 Hidden Loopholes – Discover rare exceptions (like punitive damages or specific case types) that might make attorney fees tax-deductible.
🏢 Personal vs. Business vs. Estate – Learn how deduction rules change for families, businesses, and estates in wrongful death cases.
⚠️ Avoid Costly Mistakes – Find out common errors people make when trying to deduct lawyer fees – and how to avoid an IRS audit trigger.
📖 Real Examples & Cases – Get clarity with examples and court rulings that explain what you can deduct, where to claim it, how to do it right, and why the rules exist.

Federal Tax Law – Why Deducting Wrongful Death Legal Fees Is Tough

Under U.S. federal tax law, personal legal expenses (including most wrongful death case fees) are generally not tax-deductible. The IRS draws a sharp line between personal expenses and business or income-related expenses. Paying an attorney to pursue a personal wrongful death claim is usually treated like a personal expense – similar to a medical bill or a new car. The tax code (specifically Internal Revenue Code §262) disallows deductions for personal expenses, and unfortunately, that covers most legal fees for personal lawsuits.

However, business-related legal fees are a different story. If a legal expense is “ordinary and necessary” to running a business (as outlined in IRC §162), it can be written off as a business expense. This means that if a company incurs attorney fees due to a wrongful death case related to its business operations, those fees are deductible for the business. For example, a trucking company paying legal defense fees for a fatal accident lawsuit can typically deduct those costs on its corporate tax return. The distinction boils down to purpose: was the expense personal, or was it for earning income/operating a business?

The 2% Rule and the TCJA – What Changed?

In the past, individuals could sometimes deduct personal legal fees as a miscellaneous itemized deduction on Schedule A. These were subject to the “2% of Adjusted Gross Income (AGI)” rule – you could deduct the portion of fees that exceeded 2% of your AGI. For instance, if your AGI was $100,000 and you paid $5,000 in qualifying legal fees, you could deduct the amount over $2,000 (which is 2% of $100k). This provided a modest tax break for some plaintiffs. But recent tax reforms eliminated this break: from 2018 through at least 2025, the Tax Cuts and Jobs Act (TCJA) suspended all miscellaneous itemized deductions.

In plain English, you can no longer deduct personal attorney fees on your federal return at all during this period. Even the old 2% threshold rule is essentially on “pause.” Unless Congress changes the law or extends the suspension, miscellaneous deductions are set to return in 2026 – but as of now, you get no federal write-off for personal legal expenses.

Important: The TCJA change means many taxpayers who previously deducted things like legal fees, union dues, or unreimbursed work expenses can’t do so until the law sunsets. If you’re looking at IRS instructions or articles from before 2018, be aware that those rules won’t apply until (and if) they come back in 2026. Always check the current year’s rules.

Above-the-Line Deductions – Rare Exceptions for Legal Fees

While most personal legal fees are off-limits for deduction, Congress carved out specific exceptions to prevent obvious unfairness. Certain types of cases allow attorney fees to be deducted “above the line” (meaning you don’t even need to itemize; you subtract these fees directly from your income). These exceptions were created so plaintiffs wouldn’t be taxed on money that went straight to their lawyer. For example, attorney fees for employment discrimination, whistleblower awards, and civil rights claims can be deducted above the line (see IRC §62(e)). In those cases, even if you take the standard deduction, you can still write off the legal fees related to the award, effectively being taxed only on your net recovery.

Where does wrongful death fit? Typically, wrongful death lawsuits (often stemming from negligence, accidents, or medical malpractice) do not fall under those special categories. They are usually considered personal injury claims. Unless your wrongful death case includes a claim that qualifies as an “unlawful discrimination” or civil rights violation, you likely cannot use an above-the-line deduction for your attorney’s contingency fee. An example might be a wrongful death that occurred due to a hate crime or a civil rights violation by an official – that could potentially bring the case into the civil rights realm, making fees deductible. But those situations are uncommon. For the vast majority of wrongful death claims, there is no above-the-line relief: the plaintiff cannot deduct the lawyer’s cut on their federal 1040.

Key Terms: Adjusted Gross Income (AGI) is basically your income minus certain adjustments but before standard or itemized deductions. It’s an important figure because many deductions (like the old 2% rule) were based on a percentage of AGI. Miscellaneous itemized deductions refer to write-offs like investment fees, unreimbursed job expenses, and personal legal fees – many of which were subject to that 2% threshold and are now temporarily disallowed. When we say a deduction is “above the line,” we mean it comes off your gross income to arrive at AGI, rather than being part of itemized deductions below the AGI line. Above-the-line deductions are generally more valuable and easier to claim (since you don’t need to forego the standard deduction to use them).

Taxable vs. Tax-Free Settlements – Why It Matters for Legal Fees

Whether you can deduct lawyer fees for a wrongful death case heavily depends on what kind of compensation the case involves – specifically, whether the settlement or judgment is taxable or tax-free. U.S. tax law treats different types of lawsuit payouts differently, and this directly impacts your ability to write off expenses. Let’s break down the scenarios:

Physical Injury Settlements (Non-Taxable Awards)

Most wrongful death settlements are intended to compensate the family for their loss (e.g. lost financial support, emotional suffering, medical and funeral costs). Under IRC §104, damages received for physical personal injuries or sickness (which wrongful death inherently involves) are not included in taxable income. In other words, the IRS does not tax the typical compensatory damages in a wrongful death case. If you settle with a hospital or a driver’s insurance for the wrongful death of a loved one, the portion of the money that compensates for things like loss of companionship, pain and suffering, or lost future earnings is generally tax-free at the federal level.

Because this money isn’t taxed, any attorney fees you paid to obtain it don’t generate a tax deduction. It might feel like you should get to deduct a large expense like legal fees, but the tax code has a logic: it won’t tax your award, but then it also won’t give you a deduction for costs to get that award. In tax terms, expenses allocable to tax-exempt income are nondeductible (see IRC §265). The reasoning is to prevent a double benefit – you already aren’t taxed on the settlement, so allowing a deduction on top would be a double dip.

Example: Sarah settles a wrongful death lawsuit against a negligent trucking company for $500,000. Her lawyer takes a 30% contingency fee, i.e. $150,000, leaving Sarah with $350,000. The entire $500,000 is for her family’s loss (a compensatory damage for personal injury/death), which is not taxable income. Come tax time, Sarah does not have to report the $500k as income – but she also cannot deduct the $150k legal fee on her Form 1040. Essentially, the IRS is hands-off: it neither taxes the reward nor provides a deduction for the cost of earning it.

Punitive Damages and Interest (Taxable Components)

Now consider a different scenario: some wrongful death cases include punitive damages or interest on the judgment. Punitive damages are extra amounts the court awards to punish the wrongdoer for egregious behavior, rather than to compensate the family for a specific loss. Interest might accrue on an unpaid judgment from the time of verdict until payment. Both of these components are taxable income to the recipient. The IRS taxes punitive damages (even in a physical injury case) and interest as ordinary income. This is where things get tricky – and potentially unfair – for plaintiffs.

If part of your settlement or award is taxable, you would naturally think you should be able to deduct the proportionate attorney fees used to secure that taxable portion. Indeed, prior to 2018, plaintiffs could deduct those legal fees as a miscellaneous itemized deduction (subject to the 2% AGI rule). However, with the TCJA changes, that itemized deduction is off the table through 2025. Unless you qualify for one of the special above-the-line categories, you might end up paying tax on money that went directly to your lawyer. This unpleasant outcome was highlighted in a famous Supreme Court case, *Commissioner v. Banks (2005). In Banks, the Court ruled that if you win a taxable lawsuit recovery, you must include the full amount in your gross income – even the portion your attorney takes. Essentially, the IRS views it as you earning 100% of the award and then paying your lawyer, rather than you only earning your net share.

Why does this matter? Imagine you won $100,000 in punitive damages in a wrongful death case, with a 40% contingency fee agreement. Your lawyer gets $40,000, you get $60,000. If that $100k is taxable and you have no way to deduct the $40k fee, you could owe, say, $24,000 in taxes (if in roughly a 24% tax bracket) on the full $100k. That’s $24k tax on only $60k in actual money you kept – effectively nearly a 40% tax on your net. In higher brackets or with state taxes, it gets worse. In extreme cases, plaintiffs have faced scenarios where the tax bill on a judgment exceeded the cash they actually received after legal fees. This shows how vital – yet limited – the deduction for legal fees can be.

So, can you deduct fees for punitive damages or interest? Yes, in theory, but current law makes it hard. If you have a wrongful death award that includes taxable pieces, here are the possibilities:

Above-the-line deduction: If the case falls under allowed categories (for example, a punitive damage award stemming from a civil rights wrongful death case might qualify), you could deduct attorney fees up to the amount of the taxable award on Schedule 1 (as an “Adjustment to Income”). This would ensure you’re taxed only on the net amount. Again, standard wrongful death cases don’t usually meet these categories, but it’s worth checking with a tax professional if there was any federal or state law violated that is on the approved list (civil rights law, etc.).
No deduction currently: If no above-line exception applies, an individual cannot deduct these fees for now. You’ll have to report the taxable punitive damages or interest as income and pay tax on the full gross amount. This is a tough pill to swallow. (One small silver lining: if miscellaneous deductions return in 2026, and if you happen to receive or pay fees then, you might deduct them in the future. But for now, no.)
Estate or business context: There’s a workaround in some cases if the award is received through an estate or business entity (more on this later). A family might choose to structure the lawsuit such that the estate of the deceased receives the punitive damages, for instance. The estate, as a separate taxpayer, might have some ability to deduct those fees on its income tax return (since estate/trust tax rules for deductions differ somewhat). Similarly, if a business entity was involved, it might deduct legal costs. These strategies get complicated, but they underscore that who receives the income can affect deductibility.

Example: The Smith family wins a wrongful death lawsuit against a manufacturer. The verdict: $2 million compensatory (for their loss, non-taxable) and $500,000 punitive (taxable) = $2.5M total. The attorney’s fee is 33%, about $825,000, leaving the family $1.675M net. For taxes, they must report the $500k punitive as income. Ideally, they would deduct 33% of $500k (the portion of the fee attributable to producing that taxable punitive award, roughly $165,000). But as a personal lawsuit in 2025, they cannot itemize that fee deduction. Unless the case qualifies for an above-line deduction (unlikely for a standard product liability death), the Smiths will pay tax on $500k they never fully received. They might owe around $185k in tax (if in top brackets federally and state), just on that punitive portion. That tax will come out of their net recovery. Planning with a tax advisor before finalizing the lawsuit could help – for instance, sometimes settlements can be structured to allocate more to non-taxable categories (within reason and legal bounds) to minimize punitive exposure.

Emotional Distress and Other Taxable Damages

In wrongful death cases, most damages are tied to physical injury or death (non-taxable). But occasionally, settlements include amounts for things like emotional distress that are not directly attributable to physical injury. Under tax law, payments for emotional distress or mental anguish not stemming from physical injury are taxable (except for the amount of actual medical expenses for emotional distress). In a wrongful death context, this might be less common (since emotional suffering of survivors isn’t taxed if it flows from the physical injury/death of the victim – it’s part of the non-taxable personal injury damages). However, if any portion of your recovery is categorized in a way that’s taxable, the same logic applies: you’d ideally want to deduct fees for that portion. The bottom line remains: taxable award portion = potential deduction (but only if law permits), tax-free award = no deduction needed or allowed. Always examine the settlement breakdown (often detailed in the settlement agreement or court judgment) to see which parts might be taxable.

State Tax Nuances: Does Your State Allow Legal Fee Deductions?

Federal law is only half the story. State income tax laws can have their own twists on deducting attorney fees. Depending on where you live (or which state’s tax return you file), you might get a break on legal fees even if the IRS says no. Here are some key points on state variations:

Federal Conformity: Many states base their tax codes on the federal tax code to one degree or another. Some states start their calculations with Federal AGI, then make modifications. Others start with Federal taxable income. If your state fully conforms to federal rules on itemized deductions, then the state will also disallow personal legal fee deductions during the TCJA suspension period. For example, New York and Illinois largely follow federal definitions of itemized deductions – meaning if it’s not deductible on the federal Schedule A, it’s not deductible on the state return either.
States that Decoupled: A few states did not conform to the federal elimination of miscellaneous deductions. Notably, California still allows miscellaneous itemized deductions on its state tax returns. That means in California, you can potentially deduct personal legal expenses (including attorney fees from a wrongful death case) as an itemized deduction on your California state return, even though you can’t on federal. California’s tax law basically ignored the TCJA change for this category, so things like investment fees, unreimbursed job expenses, and yes, legal fees, are still deductible for California filers. This could result in some state tax savings. Minnesota has also been mentioned as allowing the 2% miscellaneous deductions to continue. Each state is different: Alabama and Hawaii, for instance, often decouple from certain federal changes and may allow more deductions. The list can change as states pass new legislation, so check your state’s department of revenue guidance or consult a CPA.
No State Income Tax: If you live in a state with no income tax (e.g. Texas, Florida, Washington), then state tax treatment of legal fees is moot – you’re not filing a state income tax return or paying state tax on the settlement in the first place. The focus is all on the federal side for you.
State Taxability of Settlements: One more nuance – most states follow the federal rules on what is taxable income (so they also don’t tax personal injury compensatory damages, but they do tax punitive damages, etc.). A few states might have quirks. For instance, Pennsylvania does not tax certain types of damage awards at the state level even if the feds do, because PA has its own definition of taxable income. It’s worth checking if your state has any exemption for lawsuit awards or portions of them. If your state doesn’t tax, say, punitive damages, then the need to deduct attorney fees for that portion on the state return becomes irrelevant (no tax, no deduction needed). Conversely, if your state taxes something the federal doesn’t (rare, but hypothetically), you’d want to see if the state allows a deduction.

Bottom line: Always consider both federal and state rules. It’s possible you won’t get a federal deduction for your wrongful death lawyer fees, but you might get a state deduction that saves you some money on your state taxes. Be sure to prepare your state return carefully or discuss with a tax preparer. The differences can be significant – for example, California’s allowance of those deductions could save a California family thousands in state tax on a large attorney fee, even though their federal taxable income is unchanged.

Personal Lawsuits: Deduction Rules for Individuals & Families

When you’re pursuing a wrongful death claim as an individual or family, you’re typically dealing with personal tax rules. As discussed, that generally means no deduction for your attorney costs on your federal return. To recap in simple terms:

Personal wrongful death case, compensatory damages only: No taxable income, no deduction for fees.
Personal case with some taxable damages (punitive/interest): Taxable income on that portion, but under current law you likely cannot deduct the corresponding fees (resulting in tax on gross).
Exception cases: If the wrongful death claim falls into a special category (e.g. violation of civil rights, or it’s part of an employment-related action), there could be an above-the-line deduction for fees. This is unusual, but not impossible. Always identify the legal basis of the claim – sometimes wrongful death claims are bundled with other claims. For example, imagine a case against a city for wrongful death and violation of the victim’s civil rights. The attorney fees might be partly deductible above the line due to the civil rights aspect.

For most grieving families, though, the reality is stark: you cannot write off your lawyer’s contingency fee on your Form 1040. This is true even though that fee might be enormous and even if the IRS is making you pay tax on the lawyer’s portion of a taxable award. It’s an outcome many find counter-intuitive or unfair, but it is the current law.

Example (Personal Case): Maria’s husband tragically died due to medical malpractice. She sues the hospital and wins a $1 million wrongful death settlement. The breakdown: $1M compensatory (for her family’s loss, pain and suffering) and no punitive damages. Her attorney takes 40% ($400k). Maria receives $600k net. For taxes, Maria will report $0 of that $1M on her federal income tax return (because it’s all excludable personal injury damages). She cannot deduct the $400k legal fee on her federal return (there’s no income to offset and it’s a personal expense). On her state tax return, Maria checks the rules: she lives in Arizona, which conforms to federal – so no deduction there either. She ends up paying no tax on the settlement (good news), but she also gets no tax relief for the fee (it’s as if that money never existed in the tax world).

Example (Personal Case with Punitive): Now say the jury also awarded Maria $200k in punitive damages, making the total $1.2M. Punitive damages are taxable. Now, Maria must include $200k as income this year. Assuming a 32% federal tax bracket, that’s $64k federal tax due (plus state tax if applicable). Her lawyer’s fee on that $200k portion was $80k (40%). Ideally, Maria would only be taxed on the $120k she actually kept from the punitive award ($200k minus $80k fee). But since her case doesn’t qualify for an above-line deduction, she has no way to deduct the $80k. She pays tax on the full $200k, essentially paying taxes on $80k that went to her lawyer. It’s an unpleasant surprise. If she lives in California, however, there’s a bit of relief: she can include that $80k as a miscellaneous deduction on her CA state return (since CA allows it), softening the state tax bite. Federally, though, she’s stuck. This scenario underscores why understanding these tax rules upfront is crucial – sometimes lawyers can negotiate to structure settlements differently (for example, allocating more to compensatory versus punitive in a settlement agreement, if both parties agree), which can reduce the tax burden. Always discuss potential tax outcomes with your attorney when resolving a case involving punitive damages.

Business-Related Cases: Deductions for Companies and Defendants

Wrongful death lawsuits don’t only affect individuals – businesses and employers can be on either side of such cases too. The tax treatment of legal fees changes significantly when a business entity is involved. Here’s what to know:

When a Business Is the Defendant

If your business (or you, as a sole proprietor) are being sued for wrongful death – for example, your company is alleged to have caused someone’s death through negligence or a defective product – the legal fees you pay to defend that lawsuit are generally deductible business expenses. The IRS allows deductions for “ordinary and necessary” expenses of carrying on a trade or business. Legal fees paid in the course of business definitely fall under that umbrella, even if the lawsuit is about something terrible like a death. Companies large and small routinely deduct millions in legal fees for defending liability lawsuits, including wrongful death cases.

Schedule C or Business Return: If you’re a sole proprietor or single-member LLC, you would include the attorney fees (and any settlement payouts) on your Schedule C as expenses, reducing your business’s profit (and hence your taxable income). If your business is a partnership or S-corp, the expenses would be on the partnership or corporate tax return, flowing through to your personal taxes by lowering your K-1 income. A C-corporation simply deducts the legal costs on its corporate return. In short, the tax system treats lawsuit defense costs as a cost of doing business.
Settlements and Judgments Paid: If the business ends up paying a settlement or judgment in the wrongful death case, that payment is also usually deductible for the business. It’s compensation to the victim’s family, but for the company it’s like paying a big bill. There’s an exception for certain penalties or fines (for instance, you can’t deduct government fines or civil penalties paid to the government), but paying damages to a private party isn’t in that excluded category. Even punitive damages paid by a company can often be deducted (though there has been public debate about whether that should be allowed, no law stops it in general). This means if your company had to pay $1 million to settle a wrongful death claim, that $1M likely reduces your company’s taxable income by the same amount. The ability to deduct these payouts somewhat softens the financial blow for businesses.

Example: XYZ Trucking Co. is sued after one of its drivers causes a fatal accident. XYZ spends $200,000 in legal fees defending the case, and ultimately pays $500,000 to the victim’s family in a settlement. On XYZ’s corporate tax return, it will list $200k in legal expenses and $500k settlement payout as deductible business expenses. If XYZ had $5 million in revenue and $4.5 million in other deductible expenses, its normal taxable profit would be $500k. After factoring in the legal costs and settlement (total $700k), XYZ would actually show a tax loss for the year – resulting in no income tax and possibly a net operating loss carryforward. In essence, the tax code cushions businesses by letting them write off litigation costs.

One caution: if you’re a small business owner and the wrongful death lawsuit is only partly related to your business, be careful. Only deduct the portion of fees truly tied to the business. For instance, if you’re personally named in a lawsuit alongside your company (common in small businesses), and part of the defense is personal (maybe alleging your personal negligence) and part is business, consult a CPA on how to allocate and deduct the fees properly. Misclassifying a personal legal expense as a business expense is a big no-no and could be seen as tax evasion. Always keep documentation and a rationale for any legal fee deductions on the business side.

When a Business Is the Plaintiff

It’s less common, but a business might be on the plaintiff side of a wrongful death or injury case. Perhaps your company suffered a loss because of someone else’s wrongdoing – for example, a key employee was killed due to another company’s negligence, and your business sues the responsible party for loss of that employee’s services or wrongful death (in some jurisdictions, employers have limited rights to sue for certain losses). Or an insurance company (a business) might sue on behalf of an insured. If a business entity is effectively the one pursuing the claim and paying the legal fees, those fees are again deductible to the business as ordinary business expenses. If the business wins a taxable award (for instance, the recovery isn’t excludable as a personal injury because a business can’t have “personal physical injury” – likely the award might be lost profits or something taxable), then the business will report the income but also has deducted the expenses, so it’s only taxed on the net gain.

In summary, business involvement generally allows legal fee deductions without the hurdles that individuals face. The tax code favors businesses by letting them count legal costs against income. So if you’re an entrepreneur or company dealing with a wrongful death case, take advantage of the deductions you’re entitled to – they can be substantial. Just be sure the expense truly pertains to the business operations. If the wrongful death is entirely personal (e.g. you personally, not your business, caused an accident at home), you cannot funnel those legal fees through your business books. That would be improper. The IRS is vigilant about distinguishing personal vs. business expenses.

Example (Personal vs. Business Expense): John is a self-employed contractor. Driving his personal vehicle on a weekend (not for work), he accidentally causes a fatal car crash and is sued for wrongful death. John hires a lawyer and pays $80,000 in legal fees to defend himself. Because this incident was personal (not arising from his contracting business), John cannot deduct the $80k as a business expense on his Schedule C. It’s a personal legal expense. If John tried to sneak it in, and the IRS audited him, they would likely reclassify it and hit him with back taxes and penalties. Conversely, if the accident had occurred while John was driving to a job site for work (i.e. within the scope of his business), now the situation changes – those legal fees have a strong argument to be a business expense. The context and purpose of the legal fees are everything.

Estate Cases: Deducting Legal Fees for the Decedent’s Estate

Wrongful death lawsuits are often filed by the estate of the deceased person or by a family member acting as an executor or personal representative. This raises additional tax considerations: the estate is a separate legal entity for tax purposes. Both the estate’s income tax and estate tax (if applicable) come into play. Here’s how legal fees might be handled when an estate is involved:

Estate as Plaintiff (Recovering Damages)

In many wrongful death claims, a family member (spouse, child, etc.) brings the lawsuit directly. But in some cases, the law requires the estate’s representative to sue on behalf of beneficiaries. For example, some states say the wrongful death action must be brought by the executor of the estate (even though the damages go to the family). Also, there may be a survival action component (for the decedent’s own pain and suffering before death, or medical bills) that technically belongs to the estate. When an estate receives money from a lawsuit, that money can either be distributed to beneficiaries or kept/invested by the estate (if the estate remains open). If any of that award is taxable (punitive damages or interest, as discussed earlier), the estate might have to report it on an Estate income tax return (Form 1041).

Estate Income Tax Deductions: The estate can try to deduct the legal fees associated with producing that taxable income on the Form 1041. Estates and trusts have a quirk: they also lost miscellaneous itemized deductions during 2018-2025 due to TCJA (yes, it affected estates/trusts similarly). However, estates can deduct certain administrative expenses that individuals can’t. The IRS has clarified that expenses necessary for the administration of an estate (which wouldn’t have been incurred if the property wasn’t held in the estate) are deductible above the line on the estate’s tax return.
- Legal fees to collect assets of the estate might qualify. If the wrongful death lawsuit is considered an effort to collect an asset (the settlement) for the estate, the estate could argue the attorney fees are an administration expense. This area is gray and might depend on specific IRS guidance or case law. In practice, many estates do deduct litigation-related costs on the fiduciary return when those costs are related to producing taxable income for the estate. It’s wise for the executor to work with a tax advisor on this, because the characterization matters.
Double-dipping prohibition: An estate cannot deduct the same expense on both the estate’s income tax return and the estate’s estate tax return. There’s a choice under tax regs – if you have an expense that could be seen as a cost of administering the estate or producing income, you choose which tax area to apply it to (and you attach a statement to the other return waiving it). Why would this matter? Consider a large estate that is also subject to federal estate tax (for 2025, estates above $12.92 million are taxable).
- Attorney fees related to a wrongful death recovery could be deducted from the gross estate value as an administration expense or claim, thereby reducing estate tax. If the estate is nowhere near taxable for estate tax purposes (most aren’t, since the threshold is high), then that’s irrelevant – you’d focus on the income tax deduction. If the estate is taxable, an executor will weigh whether it’s more beneficial to reduce the estate tax or the income tax. Generally, estate tax is a one-time 40% hit on amounts over the threshold, whereas income tax on a one-time award might be less, so deducting on the estate tax return could save more dollars. This is a complex decision requiring professional advice and is only relevant to very large estates.

Example: David’s estate sues for his wrongful death and wins $100,000 in prejudgment interest (taxable) as part of a larger settlement. The $100k interest is reportable on the estate’s Form 1041. The estate paid $50,000 in legal fees (out of a larger contingency fee) that can be attributed to securing that interest. As executor, you want to deduct that $50k on the 1041 to offset the $100k interest income. Under the current law, if that $50k is considered a cost of earning taxable income for the estate, you’d try to deduct it. If misc. deductions are disallowed, you’d argue it’s an estate administration expense necessary to collect the interest asset. Let’s say the CPA agrees and deducts $50k on the 1041. The estate then only pays income tax on the net $50k of interest. If the estate later distributes the interest to beneficiaries, it may also pass out the remaining taxable income to them via K-1s along with a share of the deduction, so the beneficiaries effectively get the deduction benefit. Planning gets intricate here, but the point is: through the estate, there might be avenues to deduct what an individual beneficiary could not.

Estate as Defendant (Paying Damages)

It’s not as common, but consider a scenario where the decedent caused someone else’s death, and now the decedent’s estate is being sued by the victim’s family. For instance, John dies in a car crash that was his fault, and the other party also died – that party’s family sues John’s estate for wrongful death. John’s estate might then pay a settlement or judgment to the victim’s family. How are those legal costs treated?

From the estate’s perspective, this is a claim against the estate. The estate can likely deduct the entire amount paid (settlement + its own legal defense costs) as a claim against the estate for estate tax purposes (IRC §2053 allows deduction of claims and expenses in determining the taxable estate). Essentially, it reduces the value of the estate subject to estate tax. Even if the estate isn’t big enough to worry about estate tax, these payouts would be considered legitimate debts of the estate. For income tax, paying a wrongful death settlement wouldn’t show up as a deduction on Form 1041 because it’s not an expense to produce income – it’s more like paying off a liability of the decedent. But if estate tax was a concern, it’s comforting to know that the estate isn’t taxed on money it had to pay out.

Example: The estate of John has $5 million in assets. John’s estate settles a wrongful death claim for $1 million with another family. John’s will left everything to his kids. Now, instead of John’s estate being $5M for estate tax (which is below the taxable threshold anyway in this example), it’s effectively $4M after the claim. If it were above the threshold, that $1M would be deductible before calculating any estate tax owed. The estate also paid $100k in legal fees to handle the litigation; those fees are also deductible as administrative expenses of the estate. For estate tax, it reduces the taxable estate; for estate income tax, the legal defense fees could potentially be deducted if they were incurred in estate administration (though defending a claim might be seen as admin). Either way, the estate’s beneficiaries essentially bear less tax because of these deductions.

Takeaway: In wrongful death cases involving an estate, an executor has some opportunities to allocate and deduct legal fees either on the estate’s income tax return or the estate tax return. This can mitigate the tax impact, especially for any taxable portions of awards or for large estates. Given the complexity, professional guidance is crucial. Executors should keep detailed records of all legal expenses and discuss the best tax treatment for those expenses. The interplay between estate and individual taxation can be confusing, but smart planning can avoid leaving a deduction on the table.

IRS & Court Rulings: Key Precedents on Legal Fee Write-Offs

The question of deducting legal fees has been debated in tax courts and addressed by IRS rules many times. Knowing a bit of this background can help you understand why the rules are the way they are:

Commissioner v. Banks (2005): This U.S. Supreme Court decision is pivotal. Two taxpayers (one involving an employment discrimination case, another an injury case) argued that since they never received the portion of the settlement paid directly to their attorneys, they shouldn’t be taxed on it. The Supreme Court disagreed, holding that a client’s gross settlement or award is fully taxable to them, even the part paid to their lawyer, except where a statute says otherwise. This case essentially forced Congress’s hand to create the above-the-line deduction for certain cases, to prevent especially unfair outcomes. After Banks, without a deduction, plaintiffs in many types of cases were paying tax on money that went to attorneys – a scenario that seemed like double taxation. In response, Congress in 2004 (anticipating this situation) enacted an above-the-line deduction for attorney fees in specific types of cases (like employment, civil rights, etc., as discussed). Unfortunately, they did not include all cases (like general personal injury or wrongful death) in that fix. So Banks remains the law: if no statutory deduction applies, you are stuck with tax on the gross recovery.
O’Gilvie v. United States (1996): This is a bit tangential, but it involved the taxability of punitive damages in a wrongful death case. The Supreme Court ruled that punitive damages are not damages received “on account of personal injuries” and thus are taxable. This case is why we know punitive damages in a physical injury or wrongful death case are taxable. It reinforces why the need for deducting legal fees on punitive awards is important – because you’re going to be taxed on them.
Tax Court Cases on Allocation: There have been various Tax Court decisions where taxpayers tried to allocate their legal fees to different parts of their case to maximize deductions. For example, if a lawsuit had multiple claims (some taxable, some not), how do you allocate the legal fees? The general principle is you should allocate proportionally to the damages that are taxable vs. tax-free.
- The IRS and courts don’t allow simply assigning all fees to the taxable portion to get a deduction. It has to be reasonable. So if 20% of your award was taxable punitive damages and 80% was tax-free compensatory, then roughly 20% of your contingent fee is considered related to the taxable portion and would be the deductible portion (if deductions were allowed). Be aware of this if you find yourself in a scenario where partial deduction is on the table (like if misc. deductions come back or you fit an exception now). Documentation, such as the settlement agreement’s breakdown and attorney billing records, can support your allocation if needed.
IRS Publications and Guidance: The IRS has been clear in publications (like Pub 529 and Pub 525) that most personal legal fees are nondeductible. They list the exceptions (and wrongful death isn’t listed, except as it might overlap with other categories). Also, the IRS issued regulations and notices after TCJA confirming that miscellaneous itemized deductions (including legal fees under IRC §212, which covers expenses for the production of income) are suspended. One interesting IRS memo (Field Service Advice 1997) noted that an estate could deduct a wrongful death settlement it paid as an estate tax deduction – showing even the IRS acknowledges estate-level deductions in certain contexts.

Staying updated is key. Tax laws can change. The current disallowance of legal fee deductions for individuals is tied to a temporary provision (set to end after 2025). If nothing is done, in 2026 we revert to prior law: personal legal fees would again be misc. itemized deductions subject to the 2% floor. Congress could also enact a broader fix, for example allowing an above-the-line deduction for all contingency fees (this has been proposed in the past). If you have a multi-year case ongoing, keep an eye on tax law changes, as they could affect the year you eventually receive money and pay your lawyer.

How to Deduct Lawyer Fees (Properly) If You Qualify

Even though most wrongful death lawyer fees won’t be deductible for an individual, let’s outline how to deduct them in the situations where it is allowed. It’s important to follow IRS rules carefully to avoid mistakes. Here’s a step-by-step guide for various scenarios:

1. Determine the Nature of the Case and Income: First, identify if any part of your lawsuit award is taxable income. Is it purely compensatory for personal injury (non-taxable), or does it include punitive damages or interest (taxable)? Also, consider who is paying/receiving the award – you personally, your business, or an estate? This will dictate what kind of tax return and which rules apply.

2. Identify Potential Deduction Categories: If you’re an individual, check if your case falls under a special category for above-the-line deductions. For example, does your wrongful death lawsuit also involve a claim of violation of law that’s on the approved list (such as a civil rights claim)? If yes, you’ll be using an above-the-line deduction (awesome!). If you’re a business or estate, you’ll be deducting the fees as business or estate expenses. Essentially, decide which of these buckets you fall into:

Personal non-qualified case (most wrongful death cases) – no federal deduction currently.
Personal qualified case (rare, e.g., civil rights related) – above-the-line deduction available.
Business expense – Schedule C or corporate deduction.
Estate expense – estate tax or estate income tax deduction.

3. Use the Right Tax Form/Line: This is crucial for actually claiming the deduction:

Above-the-Line (Form 1040): If you have an above-the-line attorney fee deduction, you’ll enter it on Schedule 1 (Form 1040), which is the form for additional income and adjustments. There’s a line (Line 24 in recent years, labeled “Other Adjustments”) where you can write in “Attorney fees – whistleblower/civil rights (IRC 62)” or similar, with the amount. This directly reduces your AGI. Keep documentation with your return (like the settlement agreement and a computation of the fee) in case the IRS questions it.
Business Expenses: If you’re deducting via a business, include the legal fees in the appropriate expense category on your business’s tax form. For a Schedule C (sole proprietor), it would go in the “Legal and professional services” expense line. For partnerships/Corps, it’s similar (a line for legal/professional fees or simply include in other deductions). Make sure it’s clearly identified as legal fees in your records. If the fees were to produce taxable income for the business (like the business won a case), they’re still just business expenses.
Estate Form 1041: For an estate deducting fees on an income tax return, legal fees would typically be listed on the fiduciary income tax return (Form 1041) under “Deductions.” You might list it as “Attorney fees” or “Administrative expenses” depending on how you justify it. If claiming as an estate admin expense not subject to the 2% floor, you may have to attach a statement or use Schedule B of 1041 to explain. If the estate is instead taking it on Form 706 (estate tax return), it would be on the schedule for debts/claims or administrative costs.
State Forms: Don’t forget to also claim on your state tax return if your state allows it. State forms often have their own line for miscellaneous deductions or adjustments. California, for example, has Schedule CA where you adjust federal itemized deductions; you’d add your legal fees back in there as allowable for CA. Read state instructions or work with a preparer to locate the exact spot.

4. Allocate Fees if Necessary: If only part of your legal fees are deductible (for instance, only the portion related to taxable damages, or you have multiple claims), do a calculation. You might use a ratio of taxable award to total award to allocate the fee. Document this calculation and be prepared to provide it if audited. Only claim the amount that is justified. It’s better to be slightly conservative than to over-claim and raise red flags.

5. Maintain Thorough Documentation: Keep a copy of the contingency fee agreement or attorney invoices, the settlement/judgment documents showing how the award was characterized (compensatory vs punitive, etc.), and any tax advice letters you got. If you’re ever questioned by the IRS or state, you want to show the fee was paid and how you determined the deductible portion. Also, if you’re taking an estate or business deduction, minutes from board meetings (for a company) or estate probate documents showing the need for legal services can help substantiate that it was a valid expense.

6. When in Doubt, Consult a Tax Professional: It’s worth reiterating – if you’re not absolutely sure about taking a deduction, ask a CPA or tax attorney. They can help interpret any new rules and ensure you don’t misstep. The cost of an hour of professional advice is tiny compared to the cost of an IRS audit or penalty if you deduct something you shouldn’t (or fail to deduct something you could have). Particularly with large settlements and fees, customized advice is invaluable.

Following these steps will help you legally maximize any deduction you’re entitled to while staying in compliance. It might seem daunting, but breaking it down as above can clarify the process. Many people only deal with such tax issues once in a lifetime (if ever), so it’s completely normal to seek guidance to get it right.

Pros and Cons of Deducting Wrongful Death Legal Fees

It may be possible in certain scenarios to deduct your wrongful death attorney fees, but should you? What are the upsides and downsides of pursuing this tax deduction? Here’s a quick look at the pros and cons:

Pros of Deducting Legal Fees	Cons of Deducting Legal Fees
Tax Savings: Reduces your taxable income if the deduction is allowed, potentially saving you a significant amount of money.	Strict Limits: Most personal wrongful death cases don’t qualify under current IRS rules, so many people cannot deduct their fees at all.
Fairness (Net Taxation): You avoid being taxed on money that went to your lawyer, ensuring you’re only taxed on what you actually received.	Audit Risk: Claiming a deduction outside of clear allowances can trigger IRS scrutiny. Deductions for legal fees are a known audit flag if misapplied.
Business Benefits: For companies, deducting legal fees and settlements treats these costs as normal business expenses, keeping the company’s taxable profits lower.	Complex Rules: Determining eligibility can be complicated. Misunderstanding federal vs. state differences or allocation rules could lead to errors and potential penalties.
Estate Tax Relief: For estates, deducting legal expenses can lower estate tax or estate income tax, preserving more assets for beneficiaries.	No Double Benefit: You can’t deduct costs of producing tax-exempt income – so if your settlement isn’t taxed, the deduction is off-limits (no matter how large the fee is).
Sunset Consideration: If miscellaneous deductions return in 2026, future cases might allow deductions again, giving plaintiffs a break. Planning for that could help in long cases.	Changing Laws: Relying on potential deductions (like post-2025 rules) is uncertain. Tax laws might change, and counting on a deduction that disappears can backfire.

As you can see, the advantages of deducting legal fees mostly come into play if you’re in a situation where deductions are permissible (taxable awards, business context, etc.). The disadvantages highlight that, for many individuals, the deduction is simply not available – and attempting to force it can cause trouble. Always weigh the potential tax savings against the risk and complexity. If in doubt, err on the side of caution or get professional advice. It’s frustrating to leave a deduction on the table, but it’s better than facing an IRS adjustment later.

Mistakes to Avoid When Handling Legal Fee Deductions

When dealing with taxes on a wrongful death settlement and related attorney fees, it’s easy to slip up. Here are some common mistakes and pitfalls you should avoid:

🚫 Treating Personal Fees as Business Expenses: Don’t try to run personal lawsuit costs through your business. The IRS can disallow the expense and penalize you. Only deduct fees on the business return if the case was truly related to the business. Keep personal and business strictly separate.
🚫 Deducting Fees for Tax-Free Money: Remember, if your settlement is not taxable, you cannot deduct the legal fees. Some people mistakenly think “I paid the lawyer, so it’s an expense, right?” – but if the income isn’t taxed, the expense isn’t deductible. Trying to deduct it will be rejected if noticed.
🚫 Ignoring State vs. Federal Differences: Maybe you learned you can’t deduct your fees federally, so you assume the same for state – and you miss out on a state deduction you were entitled to. Or vice versa, you deduct on state when you shouldn’t. Always consider both returns separately. State laws can differ from federal law! Check conformity rules for your state.
🚫 Failing to Allocate Mixed Cases: If only part of your award is taxable, you should only deduct the corresponding part of the fees (when allowed). Claiming 100% of your legal fees against a small taxable portion is a no-go. For example, don’t deduct the full $100k fee when only $20k of your settlement was taxable interest – that won’t fly. Allocate proportionately.
🚫 Missing Documentation: If you do claim any deduction for legal fees, be prepared to back it up. One mistake is taking the deduction without keeping the lawyer’s invoice or the settlement breakdown. If audited, you’ll need to prove the expense and how you classified it. Always keep those documents for at least several years after the case and tax filing.
🚫 Forgetting the AMT (pre-2018): This is less of an issue under current law because those deductions are gone entirely, but worth noting historically: even when legal fees were deductible as misc. itemized, they were not deductible under the Alternative Minimum Tax. Some folks claimed them, lowered regular tax, but then got hit by AMT and lost the benefit. Just be aware if the old rules come back: large misc. deductions could trigger AMT, nullifying the benefit. In 2025 and earlier, AMT may not matter for this since you can’t deduct anyway, but keep it in mind for the future.
🚫 Not Seeking Professional Advice for Large Settlements: Handling a small tax issue on your own with some research is one thing. But if you have a large wrongful death recovery, especially with taxable components or multi-state issues, not consulting a tax professional is a mistake. The tax nuances can be subtle, and an expert might find a deduction or strategy you’d overlook (or save you from a misstep). The cost of advice is minor compared to potential tax savings or avoiding penalties.
🚫 Waiting Until After Settlement to Plan: Tax planning after the fact is like trying to put on a seatbelt after a crash. The time to consider tax implications is before the settlement is finalized. Sometimes settlement agreements can be structured in tax-efficient ways (for instance, allocating or wording payments thoughtfully, or using a structured settlement to spread payments over time). If you wait until you get a 1099 or until you file taxes, you’ve lost opportunities. So avoid the mistake of leaving taxes out of your legal strategy – make it part of the conversation with your attorney early on.

By steering clear of these mistakes, you can navigate the tax aspect of wrongful death legal fees much more smoothly. It’s already a painful situation emotionally; the financial side shouldn’t add more pain due to avoidable errors. Being proactive, organized, and well-informed is your best defense against tax troubles in this context.

FAQ: Deducting Wrongful Death Attorney Fees and Taxes

Q: Can I deduct my wrongful death lawsuit attorney fees on my personal federal taxes?
A: No. In most cases personal legal fees from a wrongful death case are not deductible on federal returns, because they’re treated as personal expenses and current law disallows them. (0)

Q: Are any wrongful death legal fees tax-deductible for individuals?
A: Yes, but only rarely. If the case involves a claim covered by special tax laws (like a civil rights violation), attorney fees can be deducted above-the-line. Otherwise, no deduction for personal cases. (1)

Q: Is a wrongful death settlement considered taxable income?
A: Mostly no. Compensatory damages for wrongful death are tax-free. But punitive damages or interest awarded in the case are taxable income to you, since they don’t compensate for physical injuries. (2)

Q: Do I have to pay taxes on the portion of the settlement that went to my lawyer?
A: Yes. Unfortunately, the IRS generally taxes you on the full settlement amount (including your lawyer’s share) unless you qualify for a specific attorney fee deduction. You may owe tax on money you never saw. (3)

Q: Can a business deduct legal fees from a wrongful death lawsuit?
A: Yes. If the legal fees are related to the business (e.g. defending the company in a wrongful death suit), they are ordinary business expenses and fully deductible on the business’s tax return. (4)

Q: Can an estate deduct wrongful death legal expenses?
A: Yes. An estate can often deduct attorney fees either on the estate’s income tax return or the estate tax return, as appropriate, especially if the fees were incurred to produce taxable income or to settle estate obligations. (5)

Q: Will miscellaneous itemized deductions for legal fees ever return?
A: Possibly. The current ban on miscellaneous deductions (including personal legal fees) is scheduled to end in 2026. If no new law is passed, those deductions (with the old 2% AGI threshold) could come back. (6)

Q: Should I try to deduct attorney fees if I’m not sure they qualify?
A: No. Claiming a deduction you aren’t entitled to can lead to IRS audits, penalties, and interest. Only deduct legal fees when you are confident they meet IRS criteria or you have professional advice. (7)

Q: Do wrongful death settlements issue 1099 forms for taxes?
A: Usually no. If the settlement is entirely tax-free (compensatory damages), you typically won’t receive a 1099. For taxable portions like punitive damages or interest, you or your attorney might receive a 1099 for that amount. (8)