Legal Fees from Divorce Generally Not Deductible

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Q: My wife and I just completed a long, drawn-out divorce during which I paid both her attorneys' fees and mine. She claimed an interest in my business, which is my sole source of income. I wound up keeping my business, but she received a number of valuable assets and alimony. If I had not kept my business, I would have lost my income. Is there any way I can deduct these attorneys' fees?

A: Generally speaking, since the termination of a marriage is a personal matter, payments of legal fees in connection with a divorce are not deductible; however, as with most general rules, there are exceptions:

1. If the payment of legal fees is related to the production or collection of taxable income, the portion of the fees allocated to that purpose may be deducted from the payor's adjusted gross income. Here, it is highly unlikely that you would be able to deduct the fees involved in keeping your business as part of a property settlement. Unless you received alimony from your former wife, this exception would not apply to you. On the other hand, if your wife paid her attorneys, the portion of her fees allocated to those services that produced taxable income for her would probably be deductible.

2. If the payment of legal fees is related to tax advice in conjunction with the marital settlement, the portion of the fees allocated to that purpose may be deducted from the payor's adjusted gross income. The portion allocated to tax-related advice in connection with the financial issues of your divorce may be deductible

If you are entitled to a deduction of a portion of your attorneys' fees, however, your deduction will be limited to the extent that the amount deducted exceeds 2 percent of your adjusted gross income. …