After Reform, Are Divorce Legal Fees Tax-Deductible?

[divorce legal fees]

After Reform, Are Divorce Legal Fees Tax-Deductible?

This time each year, clients ask me: “Are my divorce legal fees are tax-deductible?”  For those who are preparing their 2017 income tax returns, the answer might be yes, if the divorce legal fees are related to the production or collection of taxable income.  In other words, divorce legal fees related to alimony or spousal support, but not child support or divorce, may be tax-deductible in 2017.  But the Tax Cuts & Jobs Act of 2017 (the Trump business tax cuts, or “TCJA”) will change all that next year.

Under the prior law, taxpayers who itemized their deductions were eligible to claim certain deductions under IRC § 67, if their itemized deductions exceeded 2% of adjusted gross income.  TCJA eliminated the miscellaneous itemized deductions for the tax years 2018 through 2025.  The personal and dependency exemptions worth $4,050 each in 2017 have also been eliminated from 2018 to 2025.  State and local tax deductions, including property tax, have been limited to $10,000 per year.

Many taxpayers (as many as 2/3 of those who currently itemize their deductions) will lose the benefit of their itemized deductions in 2018 due to these limitations and caps.  Taxpayers who claim the standard deduction in 2018, instead of itemizing, will not be able to deduct legal fees.

Prior to TCJA, taxpayers who itemized their deductions were eligible to deduct legal fees incurred for the production or collection of taxable income, under IRC § 212.  Frumkes & Vertz (2017), at § 7.2. Generally, the portion of the divorce legal fees related to obtaining alimony and spousal support for a recipient was tax-deductible under § 212.  That is the rule for 2017 tax returns.

TCJA did not repeal or limit IRC § 212; that deduction was preserved by the new law.  However, starting in 2019, alimony is no longer taxable income unless it is paid under a pre-2019 divorce instrument or modification to which TCJA does not apply.  If the alimony does not qualify as taxable income, then the divorce legal fees will not be deductible.

Legal fees incurred for the purpose of enforcing or modifying a pre-2019 alimony or spousal support award might continue to be tax-deductible under IRC § 212; and divorce legal fees to obtain a QDRO distribution may also continue to be tax-deductible. Divorce legal fees may, under certain circumstances, be added to basis of the property to which they relate. See Frumkes & Vertz (2017), at § 7.4.  Otherwise, legal fees incurred in connection with a divorce will not be tax-deductible (except for representing a non-employee spouse to prepare a QDRO, or enforcing or modifying a grandfathered pre-2019 alimony obligation).

To determine whether divorce legal fees are tax-deductible, read § 7.2 of my book Frumkes & Vertz on Divorce Taxation. In Western Pennsylvania, call me (Brian C. Vertz 412-471-9000) for a family law consultation or visit my firm’s website, pollockbegg.com.