Tax Deductibility of Attorney Fees in Divorce
How much do you understand about the tax deductibility of attorney fees in divorce? Did you know that some attorney’s fees incurred in a divorce action may be tax deductible? They can, but only in a few limited circumstances. Generally, attorney’s fees and other litigation costs are deductible only to the extent that they are incurred to produce taxable income.
For instance, the fees incurred in obtaining alimony are deductible, so long as the spousal support is includable in income. However, if the alimony or spousal support payments are designated as non-taxable income, then the attorney’s fees will not be deductible.
Likewise, fees incurred in actions to modify existing alimony obligations or to collect delinquent spousal support are also deductible – to the extent the underlying support is taxable. Also, it is important to note that fees incurred with regard to child support are not deductible, because child support payments are not taxable to the payee as income.
In addition, attorney’s fees incurred to obtain an interest in the employee spouse’s retirement plan are also tax deductible, because the distributions will be taxable when they are received. Fees incurred in obtaining royalties, residuals, and other income taxable to the client may also be tax deductible.
When they are deductible, attorneys’ fees are treated as “miscellaneous itemized deductions” and are only deductible to the extent they exceed 2% of the taxpayer’s adjusted gross income. Further, they are subject to a phase out when the adjusted gross income exceeds a certain amount, and they cannot be taken into consideration when computing the alternate minimum tax.
As you can tell, the deductibility of attorney’s fees is a very complex area that should always be discussed with your accountant. If you intend to attempt to deduct any such fees, you should request a letter from your attorney at the conclusion of your case that expressly identifies the deductible versus nondeductible services rendered, as the IRS will require this letter if the deductions become disputed.