Legal Fees on Cancelled Debt

Today TaxMama hears from Carole in the TaxQuips Forum, with this interesting question. “Can a person deduct legal fees paid to lawyers that negotiated their debt (both personal & business credit cards as well as a mortgage on their personal home) as an itemized deduction? I’ve read that legal fees for collecting or producing taxable income are deductible, but this seems to relate to reducing taxable income on the 1099C.”

Dear Carole,

Hmm…my first inclination is to say no.

But the 1099C generates taxable income – cancellation of debt income, right?

If there is TAXABLE cancellation of debt income  – that you cannot wipe out using the insolvency calculation – take the personal part of the legal fees as a miscellaneous itemized deduction subject to the 2% of AGI.

Take the legal fees for wiping out the business debt on Schedule C – if the cancellation of debt generated some taxable income for the business.

And remember, you can find answers to all kinds of questions about cancellation of debt and other tax issues, free. Where? Where else? At www.TaxMama.com.

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