Generally, the IRS says no to tax deductions to ease the pain for a couple who split and incurred legal fees and other costs to obtain a divorce, separation or decree of support. In certain circumstances, however, you might be able to salvage a deduction for the part of the expenses specifically allocable to tax advice in connection with a divorce or separation, as well as for legal fees to obtain taxable alimony. Here are some rules that are helpful to know.
NONDEDUCTIBLE EXPENSES. The IRS prohibits any deduction for the cost of personal advice, counseling and legal action in a divorce. For example, no write-off for what a husband spends to resist his wife’s demands for more alimony or to set aside a prenuptial property agreement.
FEES FOR ALIMONY. The portion of legal fees specifically paid (usually by the wife) to collect alimony that is taxable to her can be included, just like the cost of preparing her return, with her other itemized deductibles on Schedule A of Form 1040. The place to claim the fees is on the Schedule A line for “other expenses.” This break is available for the original proceeding by which she procures taxable alimony, as well as for any subsequent proceeding to increase it or collect arrears.
But these legal fees and most other miscellaneous deductions are allowable only to the extent that their total in any one year exceeds two percent of her AGI, short for adjusted gross income. AGI is the amount listed on Form 1040 after reporting salaries and other sources of income and claiming certain deductions such as alimony payments and money moved into retirement plans.
For someone with an AGI of $100,000 and miscellaneous outlays of $10,000, the two percent floor shrinks the deduction to just $8,000 – what is left after the $10,000 is offset by $2,000, which is two percent of $100,000.
In no event can she deduct the cost of obtaining income that is not taxable to her – say, back child support or temporary alimony while a joint return was still being filed.
FEES FOR TAX ADVICE. Subject to the two percent benchmark for miscellaneous expenses, you get to deduct fees that cover tax research and advice on such items as property transfers and dependency exemptions for the children.
But you can do so only if the bill specifies in a reasonable way how much is for tax counseling. Moreover, there is no deduction at all for your payment of your spouse’s legal fees, even if they are for tax advice only. The deduction is allowed just for advice you receive about your own tax problems.
ALLOCATING FEES BETWEEN TAX AND NON-TAX MATTERS. Does your attorney’s services include counseling on taxes? Remind the attorney to prepare a bill that breaks down deductible and nondeductible charges. That way, assuming you overcome the two percent hurdle, you are able to substantiate your deduction in the event of an audit.
According to IRS Revenue Ruling 72-245, the agency will accept a lawyer’s allocation of his or her fee between tax and nontax matters where the attorney allocates primarily on the basis of the amount of time attributable to each, the customary charge in the locality for similar services and the results obtained in the divorce negotiations.