As a general rule, expenses incurred for seeking personal advice, counseling or litigation services are not tax deductible.
However, there is an exception to this rule when a spouse (usually an ex-wife) seeks disputed alimony or a taxable property settlement in a divorce. This is because alimony is taxable to the payee. Expenses incurred in seeking taxable income are deductible.
A person cannot receive a deduction for expenses incurred in services that are not geared towards obtain taxable income. So, for example, expenses incurred in seeking back child support, or temporary alimony while the couple is still filing a joint return, are not deductible.
Of course, the spouse who is opposing the alimony award cannot deduct his or her expenses in fighting the alimony sought by the other spouse.
As with most miscellaneous expenses, the fees incurred in seeking alimony, in any one year, must exceed 2% of the person’s Adjusted Gross Income (AGI) in order to be deductible.
In addition, attorney’s services that include tax advice are deductible. This includes any research the attorney may do on children’s tax exemptions or tax consequences of a property settlement, for example. These expenses, again, are considered miscellaneous expenses subject to the 2% floor. Tax advice is not deductible if it is for your spouse. It can only be deducted if it is personal to you.
So, for example, suppose your adjusted gross income for the year is $40,000 and you incur $8,000 in expenses in seeking an alimony award. The first $800 of those expenses is not deductible because of the 2% floor. You can only deduct $7,200 of those expenses.
It is wise to have the attorney prepare separate bills for services that are tax deductible and those that are not tax deductible. If the IRS comes knocking at your door for an audit, they will usually accept the breakdown prepared by the attorney. The IRS will look at the allocation between the amount of time incurred on tax matters and non-tax matters, the customary fees charged in the locale for similar services, and the results the attorney obtains in the divorce matter. See Revenue Ruling 72-545.
The alimony payee would deduct the applicable expenses as a “Miscellaneous Itemized Deduction” on Schedule A of her 1040.
It is important to remember that alimony is taxable to the recipient and tax deductible to the person who pays it. It is deductible as an “above-the-line” expense to the payor, as long as the alimony is pursuant to a divorce decree or separation agreement, it is not paid on a voluntary basis, and it is paid by cash, check or money order. Also, alimony cannot be deducted if the parties are living under the same roof.
(Visited September 2, 2015)
(Visited September 2, 2015)
This material should not be construed as legal advice for any particular fact situation, but is intended for general informational purposes only. For advice specific to any individual situation, an experienced attorney should be contacted.