Can you deduct your legal fees for a divorce, alimony (spousal support), or related expenses? Generally, the Internal Revenue Service (IRS) says no. Here are some rules that may help.
Tax deductions lower an individual's taxable income, reducing the amount of money owed to the IRS. In 2017, President Trump signed into law the Tax Cuts and Jobs Act (TCJA), which drastically changed the types and amount of deductions individuals may claim on their annual tax return beginning in 2018. For more information on how the TCJA changed deductions, visit the IRS website.
Whether you're going through an amicable or contested divorce, the costs can be high. In most divorce cases, both sides will hire an attorney, and some will seek professional financial advisors or other experts. When it's time to file your taxes, you might wonder whether you can deduct your divorce-related legal expenses.
Unfortunately, the IRS prohibits any deduction for the cost of personal legal advice, counseling, and legal action in a divorce. If your spouse is deliberately increasing your divorce costs, your attorney can ask the judge to order your spouse to pay your legal fees.
In the past, individuals who incurred legal fees related to business-related income could deduct the fees under Section 212 of the Tax Code. However, the Tax Cuts and Jobs Act suspends this benefit until 2025.
Perhaps one of the most significant changes brought by the TCJA is the elimination of the alimony tax-deduction and income reporting requirements. In the past, the tax code allowed spouses paying alimony to deduct the payments from their income and required the recipient spouse to report the money as income. However, beginning with divorces finalized on or after January 1, 2019, the TCJA eliminated the deduction and reporting requirements.
If you finalized your divorce on or before December 31, 2018, the new tax code restrictions do not apply. Paying spouses can deduct payments from their taxable income, and recipient spouses must report and pay taxes on alimony income.
Unless expressly prohibited in your divorce decree, spouses can agree to or request a modification of alimony by the court at any time. A modification may be appropriate if either spouse has a significant change in income, health complications, or an involuntary job loss. Every state has varying laws regarding changing an existing alimony award.
If you enjoy the benefit of deducting alimony for tax purposes, you may be hesitant to change or update your alimony award after January 1, 2019—even if it reduces your payments. However, even in cases where the court (or the couple) changes an alimony award after 2019, paying spouses will continue to qualify for the tax-deduction benefits unless the new order states explicitly that the new tax law applies.
If you pay alimony, it's important to avoid any changes to the amount you pay within the first three years of the court order or divorce agreement, or you risk triggering the IRS's recapture rule.
Recapture applies if the amount of alimony changes by at least $15,000 within the first three years of alimony payments. The rule's purpose is to prevent spouses from disguising a property settlement as alimony to take advantage of alimony payments' tax benefits.
In divorce cases finalized before January 1, 2019—where the alimony payments are tax-deductible to the paying spouse, and reportable income to the recipient—the recapture rule requires the paying spouse to report as income the difference in alimony payments as income previously deducted.
For example, suppose your 2015 divorce agreement requires you to pay your spouse $30,000 annually in alimony. Three years later, you and your spouse agree to reduce your payments to $5,000 annually. When you deduct the alimony payments on your taxes in year 3, the IRS will likely flag your case as one that triggers recapture.
Unless the modification of support fits into one of the few exceptions to the recapture rule, the IRS will require you (the paying spouse) to report the decrease in payments ($25,000) as income on your taxes and will permit your spouse to request a deduction of the same amount. For more information on the recapture rule and alimony, review IRS Publication 504.
Due to the TCJA changes, the recapture rule likely will not apply to divorces finalizes on or after January 1, 2019.
Before 2019, the portion of legal fees an individual specifically paid to collect taxable alimony was also a qualified tax deduction, just like the cost of preparing the tax return, along with other itemized deductibles on Schedule A of Form 1040. Although the TCJA preserved this tax-deduction—because alimony is no longer tax-deductible for divorces finalized after January 1, 2019—the deduction is no longer applicable.
If you finalized your divorce before December 31, 2018, you will find the location for this tax benefit on the Schedule A line for "other expenses." This break is available for the original divorce proceeding by which you procure taxable alimony, as well as for any subsequent proceeding to increase it or collect arrears.
However, the IRS permits these legal fees and most other miscellaneous deductions only to the extent that their total in any one year exceeds two percent of your AGI, short for adjusted gross income.
AGI is the amount you list on Form 1040 after reporting salaries and other income sources and claiming certain deductions such as alimony payments and money moved into retirement plans. In no event can either spouse deduct the cost of obtaining income that is not taxable—say, back child support or temporary alimony while filing a joint return.
Read more on alimony, separate maintenance, and your taxes in the IRS Topic 452.
In the past, individuals could deduct expenses related to preparing a tax return. However, the Tax Cuts and Jobs Act eliminated this benefit, beginning January 1, 2019. Unless repealed or changed, the rules now impacting tax preparation fees will expire in 2025.
If you have additional questions on how your divorce impacts your taxes, speak with a qualified tax or divorce attorney in your area.