Legal Fees Paid to Spouse’s Divorce Lawyer May be Tax Deductible as Alimony

Legal Fees Paid to Spouse’s Divorce Lawyer May be Tax Deductible as Alimony

Frumkes & Vertz on Divorce Taxation §7.5

Can a spouse deduct legal fees paid to the other spouse’s lawyer?

Only fees paid to a taxpayer’s own attorney will qualify for a deduction (if all legal requirements are met).  Legal fees paid to the attorney of the taxpayer’s spouse are not tax-deductible unless the fees are structured as alimony. Paying the legal fees as alimony also avoids the 2% AGI limitation and the requirement that fees were related to the production of income or tax advice. In some respects, it may be easier to deduct legal fees paid for the other spouse – when structured as alimony – than it is to deduct one’s own legal fees.

CAUTION: tax deductible legal fees could violate the three-year anti-front loading rule, resulting in recapture, unless properly structured in amount and timing.  If fees can be paid out over a period of time so as not to violate the anti-front loading rule, the Internal Revenue Code allows payments to be deductible if they are received by the spouse or on behalf of the spouse.  Therefore, payments to a third party (i.e., the spouse’s attorney) could be deductible.  The divorce instrument should make it clear that it is the payee’s obligation that the payor is satisfying, not an obligation of the payor.

ALSO: There must be specific language that the liability for legal fee payments ceases on death of the payee.  In Hampers  v. Commmission,  T.C. Memo 2015-27, the Tax Court disallowed an alimony deduction of more than $175,000 (over three years) that a husband paid on behalf of his wife in connection with their marital settlement. The settlement order entered in 2004 provided that husband would pay wife’s legal fees for subsequent enforcement and modification proceedings, but did not explicitly extinguish husband’s obligation upon wife’s death.

The legal requirements for deducting legal fees are complex.  Read the book, Frumkes & Vertz on Divorce Taxation, for complete information.