Tax Matters

Is your divorce deductible?

By David Katzman

A divorce or separation can have a profound impact on your current and future financial situation. As a result, you may be wondering if you can deduct the actual legal costs associated with completing your divorce or separation proceedings from your taxes.

The short answer is no. As a general rule, the Internal Revenue Service (IRS) views fees associated with divorce or separation as personal expenses and they are not deductible.

However, there are some portions of these fees that could be deductible if you are careful about documenting them.

This means that your attorney or other advisors must provide a detailed invoice, with their services specifically broken out. If that does not happen, you may not be able to effectively document the deductible portions and the entire amount will be considered nondeductible personal expenses.

There are two areas where the IRS allows deductions for fees paid during the process of obtaining a divorce or separation. They include tax advice and the cost of alimony collection. You are also able to add the fees associated with dividing an asset to the base cost of this asset, which helps save on taxes when the asset is sold.   

Deducting tax advice

Depending on your specific financial circumstances, the tax aspects of your assets may be important to your overall settlement. The cost of obtaining the necessary tax advice and adequately explaining the consequences to both parties is tax deductible. However, the fees must be specifically identified.

According to the IRS, tax advisory fees can be deducted if they are incurred from a separate firm, from your divorce attorney’s firm’s tax department or from your attorney, who handles both your divorce proceedings and the tax advice. However, your invoices must reflect which fees apply to which services and only the tax advice is deductible.

Deducting the cost of collecting alimony

If you will receive alimony as a result of a divorce or legal separation, you are allowed to deduct the fees required to collect this money. If your attorney provides specific advice or performs additional duties to ensure your alimony collection—and these services are separated out on your invoice—they are deductible. These services include setting up alimony payments and enforcing their collection, if necessary. Paying an attorney or other advisor to fight alimony payments or seek a reduction in payment levels is not deductible, however.

Both tax advice and alimony collection costs are considered miscellaneous deductions and are subject to the so-called two percent rule. Your total miscellaneous deductions, which can include a wide variety of expenses, must total more than two percent of your adjusted gross income (AGI). If you meet this threshold, then you can deduct all amounts over the minimum. For example, two percent of $50,000 is $1,000. If your miscellaneous deductions totaled $1,500, you would be allowed to deduct $500, or the amount exceeding two percent of your AGI.

Fees associated with dividing assets

The final potential divorce-related deduction for, the fees you incur to divide your assets, cannot be recognized until those assets are sold, but maintaining careful records is still required. For example, if you deed your home over to your spouse, the costs involved with that transaction can be added to the basis of the property. When the property is sold, these expenses, along with the other qualifying costs of purchasing and owning the property, can be deducted from the total sale price, which may save tax dollars. All fees involved in splitting assets can be included, such as legal advice specific to the asset split, appraisal fees or other necessary costs.

A tax professional can help you determine the most tax effective approach, if you consult with that advisor early in the proceedings so the appropriate documentation can be assembled.