37.8 Legal Fees of Marital Settlements

If you are receiving taxed alimony, you may deduct part of your legal fees. Ask your attorney to divide his or her fees into charges for arranging: (1) the divorce or separation and (2) details of the alimony payments.

Caution

Spouse’s Legal Fees

You may not deduct your payment of your spouse’s legal fees as a miscellaneous itemized deduction, even if the fees are only for tax advice. Furthermore, a payment of your spouse’s legal fees will not qualify as deductible alimony even if paid under court order if liability for the payment might survive the payee-spouse’s death under state law (37.4).

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You may be able to deduct the legal fees allocated to (2), but you may not deduct the fee attributed to the divorce or separation negotiation. However, the deduction is subject to the 2% adjusted gross income (AGI) floor on miscellaneous itemized deductions (19.1) and if you are subject to alternative minimum tax, the deduction is not allowed for AMT purposes (23.2). If the alimony is not taxed to you, you may not deduct any part of the fee. However, part of a fee allocated to a property settlement may be added to the basis of the property.

If you are paying deductible alimony, you may not deduct legal fees paid for arranging a divorce or for resisting your spouse’s demands for alimony. Furthermore, you may not deduct legal fees incurred in resisting your spouse’s claims to income-producing property the loss of which would affect your earnings. That part of your legal fee that is identified as being paid for tax advice is allowed as a miscellaneous itemized deduction subject to the 2% AGI floor (19.1), but no deduction is allowed for AMT purposes.

Whether you are paying or receiving alimony, the following types of proof may support a miscellaneous itemized deduction for the part of the fee allocated to tax advice:

• The fee is charged by a firm that limits its practice to state and federal tax matters and is engaged to advise on the consequences of a property settlement involving the transfer of property in exchange for other property and the release of the other spouse’s marital rights in the property.
• The fee is charged by a firm engaged in general practice that assigns tax problems, such as the tax consequences of creating an alimony trust, to its special tax department. On the bill, an allocation is made for tax advice based on time, complexity of the case, and the amount of tax involved.
• An attorney handles the divorce for a fixed fee and also gives advice on the right to claim exemptions for the children following the divorce. The bill allocates part of the fee to the tax advice, based on time, and fees customarily charged in the locality for similar services.