Critter Corner: Are Estate Planning Services Tax Deductible?

Dear Commander Bun Bun,
Every year, at around this time, I begin paying close attention to tax deductions, as the end of the year is drawing near. I was wondering, if someone has used your firm to do estate planning in 2016 or plans to do so before the end of the year, are the legal expenses tax deductible?
Thanks!
Dee Ducshuns
Dear Dee,
Yes, a percentage of your estate planning expenses are, in fact, tax-deductible, as per the 2% rule.
This the 2% rule and how it works: Attorney’s fees are deductible only to the extent they exceed 2% of the taxpayer’s adjusted gross income and they are subject to a phase out when the adjusted gross income exceeds a certain amount.  They cannot be taken into account in computing the alternate minimum tax.  In order to take advantage of the 2% rule, the client should pay all deductible legal fees in one year.
Attorney’s fees are deductible to the extent they are incurred:
  • to produce income that is includable in the recipient’s gross income;
  • for the management, conservation, or maintenance of property held for the production of income;
  • in connection with the determination, collection, or refund of any tax;
  • to the extent they are paid for tax planning advice;
  • Expenses, to be deductible under section 212, must be “ordinary and necessary.” Thus, such expenses must be reasonable in amount and must bear a reasonable and proximate relation to the production or collection of taxable income or to the management, conservation, or maintenance of property held for the production of income;
  • When deductible, attorney’s fees are treated as “miscellaneous itemized deductions.”
More details can be found by reading Merians v. Comm’r, 60 TC 187 (1973) (involving estate planning using an irrevocable trust) and Wong v. Comm’r, TC Memo. 1989-683 (1989) (involving estate planning using a revocable trust). The Tax Court ruled that twenty percent (20%) of a non-itemized estate planning bill was deductible as tax advice under Section 212(3).
So, we suggest that 20% of the total fees that you paid to our firm can appropriately be considered deductible tax advice.
If you haven’t done your estate planning yet, now is a good time to get it done before the end of the year so you can take advantage of the deduction for this year!
Hop this is helpful!
Commander Bun Bun
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