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