Q. I obtained orders for spousal support, which my husband objected to
without success, in our pending dissolution. A friend told me that I am
entitled to deduct all my attorney fees on my federal and state income
taxes as an allowable expense. Is this correct?
Fountain Valley, CA
A. Yes, but....
Cyndi, here are some general rules, and of course they assume you are not
filing jointly with your spouse in the year in question (in which case
support would not be taxable to you or deductible to him, in any event):
First, as a larger issue either spouse can deduct attorney fees or accountant's
charges that are rendered in relation to tax planning advice. Much of
what may occur in a marital dissolution may include such advice in complex
high-asset cases, including negotiating and structuring settlement agreements
to maximize or minimize tax consequences. Often potential tax consequences
can affect the division of community property in such dissolutions, and
to the extent that your legal or accounting professional provides recommendations
on those subjects, their charges for that work are probably deductible.
Settlements can likewise include estate planning considerations that are
intended to affect tax consequences, and those costs may be proper deductions
on your tax returns.
Costs for drafting Qualified Domestic Relations Orders (QDROs), used to
divide pension or retirement type assets, are also deductible. IRC section 212(1).
As to legal fees or other litigation costs incurred to obtain a right to
receive spousal support or to collect delinquent spousal support, these
are likewise fully deductible. The IRS reasons that fees and costs charged
to permit you to obtain income that is includible in your gross, taxable
receipts should themselves be deductible because you will be taxed upon
that income. This is why costs for drafting QDROs are deductible - upon
receipt of those benefits, you will be taxed on them. [IRC section 212(1);
Regs. section 1.262-1(b)(7);
Hesse v. Commr. (1973) 60 TC 685, 693-694, aff'd (3rd Cir. 1975) 511 F.2d 1393)].
For the majority of cases, really only spousal support and the division
of retirement assets will involve tax deductible work, however.
Legal fees or costs incurred to obtain a child support award or to collect
child support are not deductible for the inverse reason: You will not
be taxed on those receipts as child support is not considered income.
Similarly, fees over custody are never deductible.
On the other side of the coin, a payor of spousal support (i.e., your husband
in this example) does not get to deduct the attorney's fees or costs
that he incurs in opposing or resisting your right to receive spousal
support even though the alimony your receive is itself deductible, nor
can he deduct charges incurs for fighting the collection of delinquent
spousal support if that later becomes an issue. [
Sunderland v. Commr., TC Memo. 2009-210]. Likewise, he cannot deduct charges for attempting
to terminate his spousal support obligation - but you may have the right
to claim your costs if you successfully defend his attempts to do so.
As a practical matter, many lawyers including myself often fail to allocate
these costs in real time on their billing statements as between work that
receives a tax deduction and work that does not - i.e., drafting most
portions of an MSA or Stipulated Judgment settling the case, which will
not be deductible, and as between those portions relating to spousal support,
tax related estate planning, dividing pensions, and so on, and others
except upon request. Fortunately, it is not at all fatal that your attorney's
billing statement initially fails to break these out: Simply ask him or
her for such a statement.
Alternatively, possibly the fees incurred for obtaining the right to receive
spousal support are obvious from your attorney's billing statement,
as where there are no children and the only relief you sought was for
spousal support. This becomes more problematic where you've asked
for other court orders, as where the fees for drafting an RFO and going
to Court may have also included work relating to child custody (not deductible)
or child support and therefore only a portion are appropriately expensed
as a deduction.
Ask your attorney to render to you a statement of the portions of his fees
and costs which he determines are solely related to tax deductible categories
and retain that for your records in case the IRS ever wishes to review them!
And be sure to claim these deductions to that the government doesn't
get money it is not entitled to!
Author: Thurman W. Arnold III, CFLS