Are Your Divorce Expenses Tax Deductible?
Get clear on the tax deductibility of divorce expenses. Discover how recent tax law changes affect what you can claim.
Divorce proceedings often involve significant financial outlays, prompting many individuals to inquire about the potential tax deductibility of these expenses. Tax laws concerning personal expenditures, including those related to divorce, can be complex. Understanding these regulations is important for navigating the financial implications of a marital dissolution.
Understanding Non-Deductible Personal Expenses
Legal fees and most other costs associated with a divorce are not tax deductible. The Internal Revenue Service (IRS) categorizes these as personal expenses, which are not eligible for deductions because they are not directly related to generating income or a business.
Legal fees incurred for obtaining a divorce decree, establishing child custody arrangements, or dividing marital property are considered personal and non-deductible. Costs related to negotiating alimony, unless specifically for tax advice, also fall under this non-deductible category. The fundamental reason for this treatment is that the expenses arise from a personal matter, not from an income-producing activity.
The nature or purpose of the expense dictates its deductibility, not merely the fact that it arose during a divorce. Legal fees for personal injury claims or general litigation associated with the dissolution of marriage are not deductible. Only costs tied to specific income-generating or tax-related activities might qualify for an exception.
Specific Expenses and Current Tax Law
Historically, specific divorce-related expenses were eligible for deduction as miscellaneous itemized deductions. These deductions were subject to a 2% adjusted gross income (AGI) limitation, meaning only the amount exceeding 2% of a taxpayer’s AGI could be deducted. This included fees paid for tax advice and certain costs related to the collection or production of taxable income.
Fees for legal or accounting advice solely for tax planning in a divorce, such as understanding the tax implications of property settlements or alimony, were previously deductible. Fees paid to collect taxable alimony were also deductible under prior tax law.
However, the Tax Cuts and Jobs Act (TCJA) of 2017 brought significant changes to these rules. The TCJA suspended most miscellaneous itemized deductions subject to the 2% AGI limit for tax years 2018 through 2025. This suspension effectively eliminated the deductibility of these historically allowable divorce-related expenses for the current period.
The TCJA also changed the tax treatment of alimony for divorces finalized after December 31, 2018. For these cases, alimony payments are no longer deductible by the payer nor taxable to the recipient. This change renders legal fees incurred to collect taxable alimony irrelevant for current tax situations, as the income itself is no longer taxable.
For tax years 2018 through 2025, the narrow exceptions that once allowed for the deductibility of certain divorce-related expenses, such as fees for tax advice or collecting taxable alimony, are no longer available. Most legal fees incurred during a divorce are now treated as non-deductible personal expenses by the IRS.
Record Keeping for Potential Future Changes
Even if divorce-related expenses are not currently deductible, it is prudent for taxpayers to maintain meticulous records. Documentation, including itemized invoices from attorneys and accountants, receipts for other related costs, and proof of payment, can be valuable. This detailed record-keeping provides a clear trail of all expenditures.
Professional bills should be clearly itemized, distinguishing between general personal legal services and any specific advice provided, such as tax or investment guidance. While these specific items may not be currently deductible, detailed records can support any claims should tax laws change. Tax laws are subject to modification, and provisions suspended by the TCJA are currently set to expire at the end of 2025.
Maintaining records could prove beneficial if deductions are reinstated or new tax provisions are introduced in the future. This proactive approach ensures taxpayers are prepared for any potential shifts in tax legislation that might impact the deductibility of divorce expenses.