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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

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.