Divorce is gut-wrenching, emotionally draining, and prohibitively expensive. Can you get some relief by claiming part or all of your divorce costs as deductions on your federal taxes, though?
You are not permitted to deduct divorce and attorney legal fees in most cases, although there are some very restrictive exceptions you can use to your advantage. The best approach to the latter is to work with a competent divorce attorney.
You should keep in mind that all tax rules are subject to change. While this information is current through the publication of this article, it should not be considered conclusive regarding applicable tax liabilities or deductions.
If you are wondering if legal fees for divorce are tax deductible, here is a summary of what you can and cannot do to maintain legal tax compliance.
Table of Contents
- 1 Can I Deduct Legal Fees and Court Costs of a Divorce?
- 2 Are Divorce Attorney Fees Tax Deductible?
- 3 What Legal Fees are Tax Deductible?
- 4 Is Alimony Taxable?
- 5 Do I Have to Pay Taxes on a Divorce 401K Settlement?
- 6 The Importance of Consulting with a Divorce Lawyer
Can I Deduct Legal Fees and Court Costs of a Divorce?
In just about every instance, the answer is that you can’t deduct legal fees and court costs that are part of the process of a divorce. You can deduct some business fees, provided they are not directly related to a divorce. The following is advice from the IRS Publication on tax rules for divorced individuals.
- Legal fees and court costs associated with divorce are not tax deductible
- Legal fees for advice related to taxes in a divorce are not deductible
- Legal fees to get alimony are not deductible
- Fees paid to appraisers, actuaries, and accountants for determining tax liability or alimony are not deductible
- You cannot deduct fees you pay a spouse or former spouse unless it is for alimony
- If your payments are not a legal obligation, they may be subject to the gift tax
Legal Fees Associated with Settlements
Legal fees, in this case, are associated with achieving a financial settlement or protecting income-producing property. You cannot deduct the legal fees associated with a property exchange as part of a settlement, but you can add the value of arranging and filing a deed to put a title on a house solely in your name to the house’s basis.
Are Divorce Attorney Fees Tax Deductible?
No, divorce attorney fees are not deductible under the law. Attorney fees include, but are not limited to:
- Personal legal advice, including personal advice apart from the divorce
- Legal actions taken during the divorce
The IRS considers money spent on a divorce personal spending and is not subject to deduction eligibility.
What Legal Fees are Tax Deductible?
Most legal fees are not tax deductible. There are, however, some fees you can deduct if you closely adhere to the law concerning expenditures and their purpose.
If your itemized deductions exceed 2% of your Adjusted Gross Income, you potentially can deduct the following if it is related to your divorce:
- Tax planning for financial and taxable assets included in the divorce
- Fees associated with obtaining alimony or child support
- Fees associated with securing interest in a qualified retirement plan
To ensure that you maximize the tax deductions in these situations, make sure that you coordinate with a divorce attorney. It would also benefit you to talk to a tax expert specializing in divorce and divorce planning.
Is Alimony Taxable?
Per IRS recommendations for people who are divorcing and the Tax Cuts and Jobs Act, alimony or separate maintenance payments related to a divorce agreement after January 1, 2019, or later is no longer tax deductible by the payer of alimony. The receiver of an alimony or maintenance payment does not have to report the payment as income.
Before the Act, alimony was tax deductible, and the receiver of payments had to claim it as income on their federal tax return.
Alterations may change the tax impact of payments. The Act also applies to modified payment arrangements implemented before January 1, 2019. If the papers were changed specifically to indicate that the alimony deduction applies, the agreement’s payments are taxable.
In cases where the agreement remains unchanged, the prior law applies regarding deductibility and declaration of income.
As with any divorce and alimony, you must understand all the implications before you agree to any payments, receipts, or alimony arrangements.
Do I Have to Pay Taxes on a Divorce 401K Settlement?
As with most retirement investments, a 401K in a divorce settlement is not taxable. Additionally, any transfer between spouses contains no tax liability or deductions. The settlement must be included in the agreement for the liability and deduction rules to apply. The agreement language must specifically outline any transfer or changes resulting from the settlement.
As always, tax penalties apply to withdrawals or payments made after the transfer. Transfer per the agreement is non-taxable.
The Importance of Consulting with a Divorce Lawyer
Technically, finding a good lawyer is preferable but not mandatory. You can go it alone if the divorce is uncontested, but even then, representing yourself is not a good idea. If, however, there are any differences of opinion or if there is significant income involved, it is beneficial, if not imperative, to hire a divorce lawyer. The reasons are as follows.
You are not a lawyer (and if you are, you still need a lawyer.) You do not know the law. You can spend hours and hours trying to decipher tax law and its applicability to your divorce, or you can hire someone that does that very thing for multiple clients for a living.
Another reason that you should have an attorney is that you are so personally involved in the divorce your judgment is likely impacted by your emotions. That can make you pursue what you should ignore and ignore what you should pursue. Trying to represent yourself, particularly when negotiating a divorce agreement, is asking for trouble.
Because you are invested and do not know the law, you likely will miss red flags and make mistakes. That is normal even if you are an attorney because divorce is so personal. An attorney can help you interpret red flags, negotiate justly and not in anger, and settle on an agreement that is mutually beneficial to all involved.