As an attorney and author who has written and lectured extensively about the tax aspects of divorce, I frequently receive questions from splitting spouses going through the divorce process. A recurring question is whether the IRS permits couples contemplating divorce to take tax deductions for payments to divorce mediators or matrimonial attorneys.
The IRS generally says "no" to tax deductions that might ease the pain of divorce. The agency has no sympathy for payments to mediators or litigators and other costs associated with a divorce. It characterizes those outlays as nondeductible personal expenses.
Fortunately, that's not the end of the story. The general rule is subject to a limited exception that allows some couples to deduct payments that are specifically for tax advice on such matters as home sales and other property transfers and dependency exemptions for their children, just the same as they deduct payments for preparation of their 1040 forms.
A reminder for couples who need help with their tax problems and turn to lawyers, accountants, financial planners or other professionals: The IRS tightly restricts write-offs for such advice.
Here's how the restrictions apply to a hypothetical couple we'll call Walter and Phyllis Neff. For starters, the Neffs lose out on any tax break for advice if they claim the standard deduction amount (the no-questions-asked amount that is adjusted annually to reflect inflation and is automatically available without the need to itemize on Form 1040's Schedule A).
The Neffs get to deduct payments for advice only if they itemize on Schedule A, where they list those payments with other miscellaneous expenses, a wide-ranging category. It includes things like unreimbursed employee business expenses, job-hunting expenses and fees for investment advice.
Another limitation is that the couple can't claim all of their miscellaneous outlays for the year in question. The IRS allows them to deduct the advice payments and most other miscellaneous expenses only to the extent that their total in any one year exceeds two percent of their adjusted gross income. AGI is the amount of the last line of the first page of Form 1040.
For instance, suppose that the Neff's AGI is $100,000 and their miscellaneous expenses total $3,000. Those numbers mean no deduction for the first $2,000 of expenses. Their allowable deduction shrinks to $1,000.
Worse yet, the Neffs forfeit any deduction for miscellaneous expenses if they're subject to the alternative minimum tax.
More than one taxpayer has learned the hard way that the courts won't bend these rules to permit deductions for divorce fees. Some of these wrangles read even better than television reality shows.
In one dispute, the U.S. Tax Court threw out a deduction by a company for legal expenses paid on behalf of Clark Hartwell, its principal shareholder, when, in a divorce action, his wife sought to acquire an interest in his stock. The company got nowhere with its argument that the wife suffered from mental problems and that her intrusion in its affairs would have jeopardized its continued success.
In another clash, the judge had to decide whether Joel Jacobs was entitled to deduct hefty legal fees for his divorce as medical expenses. The judge was unmoved by Joel's explanation that his health had immediately improved after divorcing on his shrink's orders.
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Julian Block writes and practices law in Larchmont, N.Y. He is frequently quoted in the New York Times, the Wall Street Journal, and the Washington Post, and has been cited as: "a leading tax professional" (New York Times); "an accomplished writer on taxes" (Wall Street Journal); and "an authority on tax planning" (Financial Planning Magazine).
His tax guides include "Tax Tips for Marriage and Divorce," "Easy Tax Guide for Writers, Photographers, and Other Freelancers," and "Home Seller's Guide to Tax Savings." For information about his books, go to julianblocktaxexpert.com.