When Are Divorce Costs Tax Deductible?
Understand the nuanced tax implications of divorce expenses. Learn which costs are deductible and how to accurately claim them.
Navigating the financial aftermath of a divorce can be complex, and a common question involves the tax deductibility of associated costs. Many assume all expenses incurred during a divorce are eligible for tax deductions, which is often not the case. Understanding specific Internal Revenue Service (IRS) guidelines is important to manage your tax obligations. This article clarifies which divorce-related expenses, if any, may be deductible.
Understanding General Deductibility
Most legal and other fees incurred in obtaining a divorce are not tax deductible. The IRS classifies these expenses as personal, meaning they are not considered costs directly related to producing income or managing income-producing property.
Fees associated with common divorce proceedings, such as property division, child custody arrangements, visitation rights, and the divorce decree itself, fall under this non-deductible category. For instance, legal fees paid to determine child custody are generally not tax deductible.
The rationale behind this rule is that personal expenses are not intended to generate taxable income or preserve assets for income production. Divorce actions are typically viewed as restructuring personal relationships and assets rather than business or investment activities. Therefore, the majority of legal and court costs incurred during a divorce will not be deductible for federal income tax purposes.
When Divorce Costs Are Deductible
Despite the general rule, specific, limited circumstances allow certain divorce-related costs to be deducted. These exceptions are narrowly defined and typically relate to expenses for tax advice or the collection of taxable income. It is important to distinguish these deductible costs from the broader personal expenses of the divorce process.
Fees paid for tax advice in connection with a divorce are generally deductible. This includes advice on the tax implications of alimony payments, property settlements, or other financial arrangements that have tax consequences. For example, if an attorney or tax professional advises on how a property division will affect capital gains or losses, or the tax treatment of spousal support, those specific advisory fees may be deductible. This tax advice must be clearly separate from general legal advice pertaining to the divorce itself.
Another deductible area involves legal fees incurred to collect taxable alimony. If you pay legal fees to secure or collect alimony payments considered taxable income, these fees may be deductible. For divorces finalized on or before December 31, 2018, alimony was generally taxable to the recipient and deductible by the payer. However, for divorce or separation agreements executed after 2018, alimony payments are no longer deductible by the payer and are not included in the recipient’s income.
Tracking and Claiming Deductible Costs
To claim any deductible divorce costs, meticulous record-keeping is essential. Request itemized billing from attorneys and other professionals, clearly separating services that qualify for a deduction from those that do not. For instance, an invoice should distinctly list charges for tax advice or for efforts aimed at collecting taxable alimony. This detailed breakdown provides the necessary substantiation for your tax filings.
Maintaining thorough records, including invoices, receipts, and relevant correspondence, is crucial for any expenses you intend to deduct. These documents serve as proof to the IRS that the expenses meet the specific criteria for deductibility. Without clear documentation separating deductible from non-deductible services, claiming these costs can be challenging during an IRS review.
These limited deductible expenses, when applicable, are typically claimed as miscellaneous itemized deductions. Prior to 2018, these were subject to a 2% adjusted gross income (AGI) limitation, meaning only the amount exceeding 2% of your AGI could be deducted. However, the Tax Cuts and Jobs Act (TCJA) of 2017 suspended most miscellaneous itemized deductions, including those related to tax advice and alimony collection, for tax years 2018 through 2025. Therefore, under current law through 2025, these specific deductions are generally unavailable.