If you are going through a divorce you are going to spend money ― there is no way around it. While divorce can be hurtful to your bank account, keep in mind that some of your expenses may be tax deductible. The advice that you receive from a tax professional before, during, and after a divorce can help reduce stress and lessen your tax liability.
The following advice pertains to tax deductions for divorce-related expenses.
Alimony-Related Legal Fees
You cannot deduct the costs of counseling, litigations, or personal advice. However, in some circumstances, taxpayers are permitted to deduct fees that are associated with the collection of alimony payments.
Divorce-related fees may be deductible by the party seeking taxable income (such as property or alimony). In other words, a spouse (the wife, in most cases) may deduct a portion of the legal fees incurred while disputing her alimony rights. This would be claimed as a “Miscellaneous Itemized Deduction” on Form 1040 Schedule A.
This deduction is allowed because alimony is considered taxable income to the payee. Although there are some restrictions on this divorce advice, including the following:
- The alimony, in any one year, must exceed 2% of the spouse’s AGI (adjusted gross income) ― referring to the spouse seeking alimony.
- If the attorney’s services include tax counseling, they must prepare separate bills for deductible charges and non-deductible charges. (Remember that fees for counseling and advice cannot be deducted.)
Keep in mind that alimony is considered “earned income” and may be subject to estimated tax payments by the payee. On the other hand, the payer (the husband, in most cases) may include alimony as an above-the-line deduction on his income tax return ― this is valuable advice.
If you receive alimony from a divorce, it is considered “taxable income” and must be reported on your individual tax return. The person who is paying alimony (the payer) may claim it as an “above-the-line” tax deduction, as long as they meet the IRS eligibility requirements. The requirements for deducting alimony include the following:
- The alimony must be under a legal separation agreement or decree of divorce
- Alimony payments made on a voluntary basis do not qualify
- Alimony payments must be in the form of cash, check, or money order
It’s a good idea follow this advice and deduct the alimony you pay to your ex. However, there are certain restrictions. One spouse cannot pay alimony to the other if they are living under the same roof. Make sure that alimony paid within the first 2 to 3 years is below the threshold of excess alimony, or the IRS will be suspicious.
There is no doubt that divorce can be complicated, both legally and emotionally. It is good advice to maintain (separate) detailed records and invoices, especially if a spouse is seeking a tax deduction. It’s also highly recommended that you seek professional tax advice ― you may even find that your current divorce attorney can answer some of your questions.