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Are you wondering what legal fees are tax deductible? Tax season can feel like a stressful time, especially when you’ve recently gone through a divorce. You may be wondering when the best time is to file and whether waiting for a certain date can have consequences or benefits.
With penalties and strict filing rules, it’s important to avoid any missteps that could lead to more trouble for you later. And the best way to do that is to know more about the rules.
Are Divorce Lawyer Fees Tax Deductible?
The IRS doesn’t allow any deductions for the cost of legal action, counseling, or personal advice during the process of a divorce. So, most of the time, your divorce attorney’s fees aren’t tax deductible, although some exceptions may apply.
If you paid professional fees to your attorney in the collection or production of gross income, they may be tax deductible. Talk with your tax attorney to find out if you qualify for this.
Fees to Collect Alimony
You can include the amount of legal fees you paid to collect taxable alimony with itemized deductibles on Form 1040. Claim the fees on the “other expenses” line on the Schedule A line of the form. This tax break applies to the original proceeding you used to procure taxable alimony along with any additional proceeding to increase it.
Note that these legal fees are only allowable if their total during a one-year period is over two percent of your adjusted gross income (AGI). Also, keep in mind that you can’t deduct costs for obtaining non-taxable income.
Spousal Support vs. Child Support
When are legal fees deductible for spousal support or child support? These topics are commonly misunderstood during the divorce process. Alimony (spousal maintenance) is the responsibility of one spouse to the other and benefits the one receiving the money. The funds are tax deductible for the paying spouse and count as taxable income for the spouse receiving the money.
You may deduct the portion of legal fees allocable to the enforcement of spousal support payments since the support counts as taxable income.
Are legal fees for child support tax deductible? Child support is usually paid to the custodial parent of the child, by the noncustodial parent. Child support money isn’t considered income for the receiving parent and isn’t tax deductible for the paying parent. You may not deduct legal fees used to enforce child support since it’s not taxable income.
Tax Advice Fees
You may deduct fees spent on tax research and advice for tax-related matters such as property transfers. You may only deduct these costs if you state how much of the advice was specifically for tax counseling. Note that this deduction only applies to tax advice for yourself, and not for any money you may have spent on your partner’s legal fees.
Taxes for Dividing Property
According to the IRS, division of property due to divorce doesn’t count as a taxable event. However, the tax basis of the property (the amount used to determine what you pay for capital gains tax when selling) may have an effect on your taxes.
The tax basis is usually the price of purchase in applicable situations. Ask your attorney to find out whether you’ll need to keep this factor in mind.
What is Your Filing Status?
Another factor you’ll need to contend with during tax season now that you’re divorcing is your filing status. Before, checking either “Married” or “Single” was relatively easy, but this will change with a dissolution of marriage (divorce) pending.
Under Arizona law, you can file jointly if you’re still married at the end of the tax year (December 31st). If your divorce was finalized either on or before this date, you may not file jointly.
The timing you choose for finalizing your divorce can have a significant impact on your refund and income tax liability. So, you should carefully consider what status you want to file under before becoming officially divorced.
Married filing jointly will typically come with the greatest tax benefits, like a smaller liability and larger refund. If you have a similar income as your spouse, though, there may be benefits to filing as head of household or single. Ask your tax attorney for specific advice pertaining to your situation.
Depending on the conditions of your divorce, you may wish to file separately to avoid your spouse misrepresenting you. Filing separately will make you less liable for their actions if they act fraudulently or underreport their earnings.
While filing jointly or separately comes with unique outcomes, the emotional significance of one or the other may be of greater importance to you. Keep this in mind when you decide the best time to file.
If you’re separated from your spouse and wish to file as head of household, you and your partner must have lived separately for second half of the tax year. You must have covered over half of the housing costs and your dependent children must have been living with you more than half of the tax year. If you meet these requirements, you may qualify for greater tax benefits.
Deductible vs. Nondeductible Fees
If you’re working with an attorney who offers counseling on taxes, make sure the bill breaks down charges that are deductible versus nondeductible. This will ensure that you can substantiate your deductions in case of an audit.
Have More Questions about Divorce Fees and Taxes?
Over half of Americans hire a professional to help them with their taxes each year. It’s a complicated process that divorce can make even trickier. When there are spousal maintenance fees, child support payments, and property to divide, the situation is even more complex.
The best way to make sure you’re following all the laws is to work with a family law attorney when you file. Then you’ll have someone to answer all your questions and help you get through this tough time.
To get in contact and receive help with your divorce, give us a call at (480) 467-4348 or fill out a form below.
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