Are divorce legal fees tax deductible?

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Unfortunately, most of the fees associated with your divorce are not tax-deductible. However, some portions such as those related to any tax advice related to your divorce are deductible.

Fees for Tax advice. The time and fees your attorney charges for any type of tax planning research or advice to you on items related to property transfers, retirement plan issues and dependency exemptions for the children, are deductible. For example, there are tax considerations related to the division and distribution of monies from retirement accounts. The time your attorney spends analyzing the tax ramifications and advising you, would be deductible. Important tip – make sure you have your attorney specify in his bill which portion is deductible and what portion is nondeductible (typically this is one third to one half of the total cost)- most attorneys will not make this allocation if you don’t ask.

Another avenue for deduction is fees incurred to collect alimony. This deduction is available for the original proceeding to secure alimony, as well as later proceedings to increase alimony or to collect past-due alimony

You may not want to get divorced on December 31st

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The advancement or postponement of the date of divorce by a single day at year-end can make a big difference in the amount of your tax bill – waiting could save you thousands of dollars. If you get divorced before the end of the year, even if it’s on December 31st, then you will be considered as being unmarried for the whole year and be forced to file single or head of household. There generally is a significant tax advantage to filing a joint return (although in some cases it may be better to file as a single). You may want to have your attorney postpone that year end court date, or have him or her ask the judge to delay entry of the divorce judgment until the new year. As part of your settlement, you can provide that you will file a joint return with your spouse and equally split the refund.

If you and your spouse decide to file separate returns while you’re still married, there is there are some important tax considerations to keep in mind. If your spouse itemized deductions, you’ll have a standard deduction of zero. Therefore, if the other spouse itemized his, then you should itemize deductions as well. If you pay deductible expenses out of separate funds, then you are entitled to claim those deductions. If expenses are paid from joint funds, the deduction is generally equally divided between you and your spouse.

Tax mistakes regarding the alimony rules

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Alimony must be reported as taxable income by the person receiving it. Conversely, it is deductible by the payer (child support is not tax deductible). Unfortunately, many people are unaware that they must pay taxes on the alimony and they are hit with a huge tax bill at the end of the year. Make sure you discuss this issue with you or accountant or tax preparer.

It is possible that a dispute may arise as to how much alimony was paid or received – the amounts claimed on the respective tax returns of the payor or payee might not match. This raises serious red flags with the IRS. Therefore, it is very important to keep good records.

If paying alimony, make sure you keep the following records:

1. Copies of the checks (originals are best). In the memo section, indicate that the check is for alimony and the month that the payment is for.
2. If you pay cash (which is not recommended) make sure you received a signed receipt.
3. A list showing the date, check number, amount and address where payment was made.

If you’re receiving alimony, make sure you keep the following records:

1. Keep a copy of the check received.
2. A list showing the date, check number, amount and bank and account against which the check is drawn on.
3. Copy of any receipts for cash payments.

You can be creative in negotiating settlements by considering the deductibility of alimony payments. Alimony results in tax savings since the higher income individual is able to deduct payments at a high tax rate while the spouse who has little earnings pays taxes at a much lower tax rate. However, it is very important to be aware that certain conditions must be met to make sure that the tax benefits of alimony are not revoked by the IRS. There are several key rules.

1. Paid in Cash. The payments must be paid by check or cash.
2. Written agreement. The payments must be made pursuant to an agreement such as a settlement agreement, court order or divorce judgment. The document should clearly state that the payments are deductible by the payer in taxable to the recipient.
3. Separation. The recipient must live in a separate residence.
4. Termination on death. The payments must terminate on the death of the recipient – this must be stated in the document.
5. No front loading. Alimony cannot be excessively high in the first three years after separation – for example, larger amounts paid in the first year compared to years two and three.

Make sure you negotiate the dependency deduction.

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I marvel at the number of people that do not consider the tax implications of divorce. One important consideration is the dependency deduction for children.   The current tax exemption amount for each dependent child is $3,200. For someone in the 31% tax bracket, this will save him or her over $1000 in taxes. In addition to the dependency exemption, there is also the tax credit which is currently $1,000 for each child under 17. According to the tax code, the parent that is designated as custodial parent (the parent with physical custody) in the divorce decree, is entitled to the dependency exemption. However, the parties can by specific written agreement, provide that the non-custodial parent will be entitled to claim the dependency exemption. Most judges and practitioners believe this is appropriate. If there is only one child, or an odd number of children, the parties can agree to alternate claiming the child as a dependant from year to year. This agreement must be clearly and specifically set forth in the final divorce decree or property settlement.. However, if you don’t ask for it, no one is going to offer to give it to you. Important Tip: Make sure that your attorney includes a clause in the judgment that requires the custodial parent to sign IRS Form 58332 (Release of Claim to Exemption for Child of Divorced or Separated Parents) If there are two children, the parties can agree that each will claim one of the children as a dependent.

There is also a significant tax advantage if you are able to claim head of household tax filing status. In order to claim head of household status, your home must be the principal residence of the minor child for more than half of the year. Make sure that you keep a calendar of the days and nights. Your child spends at your house and at your ex-spouse’s. Then you’ll have documentation, which you can provide to the courts and to the Internal Revenue Service (in relation to the dependency exemption and head of household filing status.). This practice will also help resolve any disputes, you have with your ex-spouse regarding who had children on a particular day.

If you and your spouse have joint custody of the minor children with approximate equal parenting time, you both may be eligible to claim head of household status if the agreement is clear. The language should indicate something to the effect that you and your spouse will arrange your schedules so that each of you will have one of the children for more than half of the year – it could be just one more day (183 days).