Tax Deductions for Divorce Expenses and Understanding Quit Claim Deeds
The Financial Challenge of Divorce
Going through a divorce can be one of the most financially challenging periods of your life. While divorce can hurt your bank account, remember that
some of your expenses may be tax-deductible to lower your tax bill later.
The IRS does not allow deductions for the cost of personal advice and legal action during a divorce. As an example, this means you cannot get a tax write-off for resisting a spouse's demands for additional support or to set aside a prenuptial agreement.
Still, you can usually get a deduction for the portion of your divorce-related expenses that are allocable to tax advice you receive in connection with your divorce and legal fees to obtain taxable alimony from a spouse. Here's what you should know about deductions for your divorce-related expenses.
Legal Fees Related to Alimony
While the IRS does not allow you to deduct the cost of litigation, personal advice, or counseling, you can often deduct legal fees associated with collecting alimony payments.
According to IRS Topic No. 452, legal fees paid to secure alimony are deductible by the payer as alimony.
Divorce-related expenses can be deducted by the party who is seeking taxable income (such as alimony) as a Miscellaneous Itemized Deduction.
The IRS allows this deduction because alimony is taxable income to the payee.
Important Restrictions on Alimony Deductions
There are some restrictions on this deduction. The alimony, during any given year, must exceed 2% of the receiving spouse's adjusted gross income (AGI). If the attorney's services include any tax counseling, the attorney must prepare separate legal bills for the deductible and non-deductible charges.
The spouse who receives alimony can deduct legal expenses related to pursuing alimony, but the paying spouse can include alimony as an above-the-line deduction on their tax return as long as:
- The alimony is under a divorce decree or legal separation agreement
- Not made on a voluntary basis
- In the form of a money order, check, or cash
Tax Law Changes Under the Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act changed the rules around alimony payments, which will affect certain taxpayers. Beginning January 1, 2019, alimony or separate maintenance payments are not deductible from the income of the payer spouse, or includable in the income of the receiving spouse, if made under a divorce or separation agreement executed after December 31, 2018.
| Divorce Agreement Date |
Tax Treatment |
| Before January 1, 2019 |
Alimony is deductible by payer and taxable to recipient |
| After December 31, 2018 |
Alimony is NOT deductible by payer or taxable to recipient |
| Modified after 2018 |
Follows previous rules unless modification states otherwise |
Legal Expenses for Tax Advice
You can also deduct legal fees paid for tax advice and research during your divorce. This may include consulting an attorney for advice about the tax consequences of transferring property and dependency exemptions for children.
It's important to note that tax-related legal counseling must be listed on a separate legal bill from non-deductible legal counsel.
You can only deduct legal fees you pay for your own legal counsel, not any payments you made toward a spouse's legal fees, even if they are only for tax advice.
The portion of legal fees an individual specifically paid to collect taxable alimony was a qualified tax deduction before 2019.
Alternative Minimum Tax Considerations
Just keep in mind you can't claim miscellaneous deductions (including legal fees) if you are subject to the alternative minimum tax, a supplemental income tax imposed on certain people, corporations, trusts, and estates.
Consult Your Attorney
While you can't deduct all of your legal expenses during your divorce, the ability to deduct fees you pay seeking alimony and sorting through tax consequences can lower your tax liability and make the financial burden of your divorce that much smaller.
This is just a brief overview of the deductions you may be able to take for your legal fees during a divorce.
Ask your attorney if you have any questions about separating your legal bill to qualify for tax deductions.
Understanding Quit Claim Deeds in Divorce Property Transfers
Do I need a quit claim deed to transfer the property to me?
If you are in the process of seeking a divorce or a legal separation, you likely have an array of questions. If you are like many people involved in a divorce or separation process, you and your spouse own real estate, most likely the marital residence.
One significant question you may have is whether you need a quit claim deed to transfer title to a piece of real estate to you.
Definition of a Quit Claim Deed
A quit claim deed differs from a warranty deed. In the case of a warranty deed, title passes from one person to another with the express guarantee that it is free and clear of any defect. In other words, the person conveying title to another bears responsibility if any defect is found after the conveyance occurs.
Title insurance usually is in place to cover such a situation. A quit claim deed contains no such guarantee or warranty. Rather,
a quit claim deed merely conveys whatever interest the grantor may have in a piece of real estate.
Understanding the Risks
No title search is undertaken. No title insurance is purchased. You take whatever interest your spouse had in the real estate, even if that interest is somehow impaired or subject to a lien.
Because you likely were co-owners before the conveyance, your interest already was subject to a potential encumbrance.
When a Quit Claim Deed is Used
Quitclaim deeds are commonly used in a variety of situations, including transferring property to one spouse as part of a divorce. In those situations, both spouses usually have a legal interest in a piece of real estate, including the marital residence.
With a quit claim deed, one spouse conveys whatever interest he or she has to the other.
Separation Agreement or Court Order
Before a quit claim deed can be executed by your spouse in your favor, there needs to be an agreement in writing or a court order addressing this issue. The settlement agreement or court order spells out that a certain piece of real estate is to be set aside to you.
The agreement or order directs your spouse to take all necessary steps to accomplish this objective, which includes executing an appropriate quit claim deed.
Legal Basis for Quit Claim Deed
In the absence of a quit claim deed, the ownership of a piece of real estate remains unchanged. If you and your spouse are co-owners of that property, you legally remain co-owners in the absence of a duly executed and recorded quit claim deed.
In the final analysis, you must have a quit claim deed executed by your spouse and filed with the register or recorder of deeds to validate your ownership in a particular parcel of real estate.
Tax Implications of Quit Claim Deeds
A joint owner who leaves the whole interest in the home to a divorcing spouse can relinquish the property using a quitclaim without incurring tax. This is an important consideration when dividing property during divorce.
Under the terms of the U.S. tax code, gift taxes are paid by the giver, but transfers between spouses during divorce are generally exempt from gift tax considerations.
Quit Claim Deed Forms and Process
A quit claim deed is not a complicated legal instrument. An attorney is likely to be able to provide you with a standard form quit claim deed.
In addition, the local register or recorder of deeds is also likely to have quit claim deed forms available in that official's office or online at the website for that office.
Important Mortgage Considerations
If you and your spouse have a mortgage on your property, and both spouses are named on the mortgage, it's important to note that deeding the property into one spouse's name alone will not relieve the grantor spouse of responsibility for paying the mortgage.
There are two ways to transfer the mortgage into only one spouse's name:
- Refinancing: Many divorce decrees or settlement agreements require that the spouses refinance the property within a certain amount of time
- Release: If the mortgage lender will allow it, you might be able to have one spouse released (removed) from the mortgage
Getting a release is often a better option than refinancing—especially when interest rates are high or the grantee spouse can't qualify to take on a mortgage in their name alone. Not all lenders will agree to release, though, so you'll have to discuss the possibility with your lender.
If the lender is agreeable, you'll likely have to provide the lender with a quitclaim deed and copy of the divorce decree.
Until the grantor spouse is released from the mortgage or the refinance is complete, the lender has the right to collect from the grantor.
And, if the mortgage is unpaid for a long enough time, the lender has the right to foreclose on the property, which will have long-lasting effects on the credit of all parties who remain named in the mortgage.
