Are the fees I paid my bankruptcy lawyer and trustee tax deductible?

Are the fees I paid my bankruptcy lawyer and trustee tax deductible?

Basic Information

Bankruptcy fees paid to lawyers and trustees can be either a tax deduction or not and it will depend on the type of bankruptcy filed, Chapter 7 or 13, and on the items included in the petition. In order to take any bankruptcy expense as a deductible item on your taxes, you will need to file a Form 1040 and itemize your expenses. If you file using the short form, you will not be allowed to claim any itemized deductions.

Deductions Allowed by IRS

Regular legal expenses for Chapter 7 and 13 bankruptcies and the filing fees, $299 for Chapter 7 and $274 for Chapter 13, are not deductible as defined in IRS Publication 908, the Bankruptcy Tax guide, which rules these fees as personal expenditures. However, if your attorney spends time communicating with the IRS regarding any tax issues you have; those fees are deductible and will be listed as a miscellaneous expense on your Schedule A tax form. Any fees that you pay to either your attorney or an accountant for the preparation of your taxes while you are in a bankruptcy proceeding will be taxable itemized deductions on your Schedule A Tax Form.

Chapter 7 and 13 bankruptcies

Allowable Expenses as Tax Deductions

Any item paid in your plan to a trustee that would normally be a tax deduction, that can still be taken as a personal tax deduction includes:

  • State taxes
  • Spousal support
  • Delinquent mortgage payments
  • Mortage interest

These are expenses that you are paying through the bankruptcy distribution process by your payment plan administrator, the trustee, and it is the same as if you were writing the check yourself. It is a good practice to ask an accountant or your attorney if you are not sure whether an item is deductible or not.

Expenses as Tax Deductions

Can You Keep Your Tax Refund After Filing Chapter 7 Bankruptcy?

Debt Forgiveness can be Excluded from Taxable Income

There is one potential form of taxable income that you will not have to report on your taxes while in a bankruptcy payment plan. Under a non-bankruptcy basis, if a creditor forgives some or all of a debt, you, as the taxpayer would be required to include the forgiven amount as a form of income. Under the rules of bankruptcy, you will not need to report the forgiven debts.

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