We are often asked whether legal fees for divorce representation are deductible on a tax return. The answer is: it depends. Most of the legal fees for divorce representation will not be deductible because they are treated as nondeductible personal expenses.
Your divorce is a matter that arises out of your marital relationship. It is not a business relationship. Thus, like other personal expenses, the cost of filing the petition, negotiating about property settlement, preparing a separation agreement, and arranging custody of the minor children are not deductible for income tax purposes.
However, legal expenses properly attributable to producing or collecting alimony under a divorce decree may be deductible as a miscellaneous itemized deduction, subject to the two-percent of AGI floor.
In addition, if you and/or your spouse were engaged in business or investment activities and the legal fees you have paid or incurred are properly attributable to the production of income or for the management or maintenance of income-producing property, those fees are deductible on Schedule A of Form 1040, as miscellaneous itemized deductions, subject to 2% floor of your AGI. For example, your spouse has been managing two rental properties owned by the two of you jointly. Your spouse has been collecting rents and depositing them in a bank account titled in your spouse’s name only. Although you have asked for your share of the rents, your spouse has not responded. Your spouse has also allowed some less-than-desirable tenants to live in one of the buildings for a reduced rent. You are seeking legal help to resolve these issues. This matter involves collecting your share of the rents and providing for proper management of the properties. Your claims against your spouse originated from your spouse’s mismanagement of the rental properties and not from your marital relationship. Even if the divorce were not in the picture, you would be seeking to resolve the issues with the rental properties. Thus, any part of part of the legal fees which are allocable to these rental property issues should be deductible as expenses for the collection of rent and the management of rental property. Any representation involving the division of the rental properties between the two of you, however, is personal.
If legal fees are deductible in part and not deductible in part, then an allocation can be made to the deductible part. This rule may apply in your circumstances.
There are two cautionary notes. First, determining the origin of a claim for purposes of classifying particular expenses involves a somewhat subjective judgment. Thus, while we may reasonably believe that certain legal fees are deductible and that the IRS will most likely allow a deduction, we cannot guarantee that the IRS will allow a deduction. Second, there is no set formula for allocating legal fees between the deductible and non-deductible portions. We do, of course, try to allocate as much as possible to the deductible portions while remaining within the bounds of the tax laws.
If you have questions regarding your particular situation, contact us to schedule a meeting with of our CPAs.Kim & Associates, PA