What Should I Do About Divorce And Taxes?
Coeur d’Alene Lawyer Specializing in Divorce
Attorney’s fees acquired during divorce are deductible in some circumstances. When they are deductible, attorney’s fees are treated as “miscellaneous itemized deductions.” They are deductible only if the fees exceed 2% of your adjusted gross income. In order to take advantage of the 2% rule, the client needs to pay all deductible legal fees in one year. Attorney’s fees and other litigation costs are deductible if they were acquired to secure income that can be included in your gross income. Because spousal support can be included in gross income, the fees incurred obtaining spousal support or in collecting delinquent spousal support are deductible. Additionally, accountant’s fees may be deductible if the work pertained to getting spousal support. Fees and costs in connection with applications for or modifications to orders of spousal support are also tax deductible. Other reasons that professional service fees might be deductible:
- obtaining an interest in a spouse’s retirement plan
- obtaining royalties, residuals, and other income
- tax planning advice.
The general rule is that attorneys, accountants, appraisers, and other experts in connection with divorce, child custody, and paternity matters are not deductible. Court costs, such as filing fees, are also non-deductible.
Attorneys’ fees incurred with divorce proceedings are considered personal expenses, and, in general, are not deductible. Even if fees are for the purpose of protecting a business, they are still considered personal.
The following list is some examples of professional fees for the production of income:
- Costs of structuring a property division to produce desired tax effects
- Costs of determining assets in a property settlement
- Costs of planning an alimony trust or an annuity agreement to avoid some of the restrictions on deductible spousal support.
- Costs of estate planning to ensure proper estate and gift tax consequences for the payment or receipt of support or property divisions.
- Costs of preparing a settlement agreement to ensure deductible support payments during the separation period.
- Costs of maximizing the deductible portion of spousal support or of minimizing the taxable portion of spousal support.
- Costs of allocating dependency exemptions.
- Costs of obtaining advice regarding the tax consequences of divorce or separation or for gathering information for actual tax return preparations
- Costs of drafting a Qualified Domestic Relations Order (QDRO) and submitting it to the plan administrator for approval.
- Fees incurred in establishing or defending title to property may be capitalized and added to the basis of property.
When it comes to your tax return and attorney’s fees, it is advisable to separately itemize the professional services that involved tax advice and the “production or collection of income.” Your attorney, with the advice of an accountant, should send you a letter at the conclusion of the case that expressly identifies the deductible vs. non deductible services rendered. In the event that your deductions are disputed, the IRS get this letter as evidence. If you’ve reached the point of divorce, contact a lawyer at the Advocacy Law Center in Coeur d’Alene to schedule a consultation.
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