As you or your accountant scrutinize every possible deduction that you may claim, you may be wondering if legal expenses are deductible. As a general rule, attorney fees in connection with divorce or custody matters are not deductible. However, there are a few exceptions to the rule.
First, attorney fees are deductible if they are used to secure income for you through the negotiation, collection, or modification of spousal support. Furthermore, if your attorney used experts, such as an accountant, to assist in any of those actions, that expert’s fees may also be deductible. Similarly, attorney fees to secure an interest in your spouse’s retirement plan, royalties, or residuals may also be deductible. The second exception allows attorney fees to be deducted when incurred through establishing or defending your title to property. For example, if during your divorce your attorney had to defend your right to your separate property so that it would not be divided, then these fees may be deductible. Finally, attorney fees are deductible if used for tax planning advice. In the context of family law, tax planning can take many forms. For instance, fees for the following may all be deductible:
- Preparing a settlement agreement that assures tax-deductible support payments.
- Estate planning that ensures proper gift and estate tax for monetary or property division.
- Legal work that maximizes the deductible portion of spousal support.
- Expert advice regarding the tax consequences of divorce or separation agreements.
- Gathering information for the preparation of tax returns.
- Negotiating who gets to take your children’s dependency tax exemptions.
- Determining the tax basis for assets in a property settlement.
- Structuring a property division for desired tax benefits.
Deductible attorney’s fees are treated as “miscellaneous itemized deductions,” and generally are deductible to the extent they exceed 2% of your adjusted gross income. In order to take advantage of these deductions, ask your attorney to send you a letter that expressly identifies the deductible fees. Then ask your accountant about these deductions, so that you can make the most of your return.