Allowable Deductions for Your Post-Divorce Tax Return
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.
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.
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, and in the form of a money order, check, or cash.
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.
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.