It’s not a secret that divorce is an expensive affair, and the equation behind it is simple to explain: the higher the couple’s shared asset value and net worth, the more costly the divorce is likely to be.
Typically, there are divorce attorneys serving the niche market of high net worth individuals, but even those clients are looking for ways to lower the overall cost of their divorce. One commonly asked question which gets posed by clients to family law attorneys and accountants alike is are divorce fees tax deductible.
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Are Divorce Attorneys’ Fees Tax Deductible?
A tax deduction is an allowance whereby the Internal Revenue Service (IRS) allows you to lower your total taxable income by a particular amount because of some event. By allowing tax deductions, the United States tax code encourages certain behavior by removing the tax penalty linked with that behavior. For instance, the interest on the expenses of operating a business or a mortgage payment is all tax-deductible.
Learn More: How Much Does a Divorce Lawyer Cost?
The law concerning tax deductions and expenses states as follows:
For individuals, all ordinary and necessary expenses incurred or paid during the taxable year will be allowed as a deduction:
- For collection or production of income,
- For conservation, management, or maintenance of any property held for the production of income, or
- In connection with collection, determination, or refund of any taxes.
Typically, the divorce process involves the collection of income, maintenance, and the management of property. However, are divorce expenses tax deductible?
In 1963, the U.S. Supreme Court answered this question by stating that the issue depends on whether the litigation expenses are a business rather than a family of personal expenses.
The Supreme Court went on to state that the characterization as personal or business of the litigation expenses of resisting claims depends on whether the legal action arises in connection with the taxpayer’s profit-seeking activities.
According to the United States v. Gilmore, 372 U.S. 53, 1963, the divorce legal fees won’t be deductible if the spouse’s claims arose entirely from the marital relationship, and not from income-production activities.
Further, IRS documents subsequently state that divorce attorney’s fees and other expenses paid in connection with a separation, divorce, or a decree for support aren’t tax-deductible by either the wife or husband.
However, parts of the divorce expenses might be tax-deductible. Thus, it’s essential to note that a deduction for legal costs isn’t precluded just because a taxpayer’s underlying claim arose in a divorce action. Typically, attorney’s fees associated with alimony are tax-deductible. Although legal fees associated with alimony collection are deductible, legal fees associated with alimony reduction aren’t deductible. So, the legal expenses or resiting or reducing alimony obligations are nondeductible personal costs.
Since 2018, spousal maintenance received by a party is no longer taxable income. If a divorce case is linked to a business’s income, expenses related to that business’s income might be tax-deductible.
This calls for a distinction between an asset and the asset’s income. Legal expenses regarding the division of the property aren’t tax-deductible while legal costs associated with an asset’s income are taxable income.
Additionally, a divorce may involve one party taking measures to protect their business from the other party’s machinations through a protective order. Legal expenses associated with defending a business from an ex-spouse are deductible. It’s essential to note that a taxpayer is eligible for deductions, such as pass-through deductions, for the portion of the legal expenses related to a protective order.
Related: How to File for Divorce in SC
Can You Claim Your divorce Attorney’s Fees as a Taxable Expense in Greenville, South Carolina?
In almost every divorce case, your accountant can’t include divorce lawyers fees as part of your income tax returns because the fees for divorce aren’t tax-deductible. Our personal advice is that you must look carefully to determine whether there are any exceptional circumstances and you must seek professional advice from a qualified accountant for this reason. The IRS now has a very strict policy and if they can argue that the expense isn’t wholly and exclusively a business expenditure because it might benefit one of the spouses then it’s taxable. This is particularly true if the expense has been included as a business-related income for corporation tax.
Many accountants won’t advise in any circumstances to allow this as a deductible expense. This may be taken in the background because of the fact that the partners in the business may take advice together with your client concerning the impact of any divorce proceedings on the business generally. The facts of each individual divorce case must be carefully reviewed to ensure that it’s not in any way a benefit of some kind but a genuine concern that has made you take the advice in the first instance.
If you seek specific advice through the divorce attorney or company solicitors as to how your spouse’s shares can be dealt with to cause the least impact on your business, then these may also be a deductible expense. Again, each case is unique and must be carefully reviewed by a reputable accountant and you shouldn’t assume that these will automatically be accepted as deductible expenses.
Please note that any agreement to put such expense through must be with the express agreement of all other shareholders as long as the accountant advises that it’s appropriate for the individual company to do so.
Be Prepared: Questions to Ask a Divorce Lawyer
Contact a Skilled Greenville Divorce Lawyer for Legal Advice!
Establishing the tax consequences of any divorce case is a complex legal process. If you need help trying to navigate the complicated legalities associated with tax exemptions and deductions related to these legal actions, consult a knowledgeable accountant in your area today.
At Greenville Family Attorneys, we helped thousands of clients get a favorable outcome in their divorce proceedings and we can help you too. To schedule a no-cost initial consultation, contact our Greenville family law firm today at (864) 375-4848.