Divorce & Taxes: Are Divorce Fees Tax-Deductible?
Divorce raises a number of issues that are not immediately apparent at first. Divorcing has potential consequences for health insurance, social security benefits, inheritance, immigration, and taxes, among other things. Many clients ask whether fees associated with a divorce are tax-deductible. Below, we discuss the tax consequences of divorce. Call a knowledgeable New Jersey divorce lawyer for help with a New Jersey family law matter.
Some Divorce-Related Fees May Be Deductible
As a general rule, the Internal Revenue Service (IRS) does not allow divorcing parties to take a deduction for attorney fees, court filing costs, and other expenses incurred in connection with divorce, legal separation, or other family law matters. There are, however, limited circumstances under which fees loosely attributable to the divorce may be deductible.
IRS rules specifically prohibit taking deductions for legal advice, counseling, or other legal actions taken in connection with a divorce. However, IRS rules do allow deductions for legal advice specifically relating to taxes, as well as fees used to secure payment of taxable spousal support. If you are obtaining legal advice concerning the tax effects of your divorce, then that advice might be tax-deductible. Additionally, if you are pursuing legal action to collect alimony payments (which are now taxable income, as discussed below), related costs can be deducted from your federal taxes. These expenses must be explicitly separated and delineated from non-deductible fees.
There are limitations on deductions relating to these types of legal services. The total fees must exceed two percent of the taxpayer’s adjusted gross income, and the fees must be separated from non-deductible fees (for example, if the same legal costs are used to obtain both alimony and child support, which is not deductible, then the legal fees would become entirely non-deductible). Talk to a lawyer familiar with divorce and tax law to ensure you are utilizing all of your available deductions while avoiding any accidental tax issues.
Alimony Tax Rules Differ Under Federal and New Jersey State Law
In addition to the deductibility of divorce legal fees, it is important to keep in mind whether alimony payments are deductible or taxed as income. Historically, alimony payments were a tax deduction for the payer under both federal and state law and were taxable as income to the recipient. The Tax Cuts and Jobs Act of 2017 changed the rules for federal taxes, however. For any alimony arrangement entered into after December 31, 2018, alimony is not deductible for the payer nor is it taxed as income to the recipient.
In New Jersey, however, the rules have not changed to fall in line with federal law: Alimony payments are tax-deductible for the payer and are taxable income for the recipient when computing state taxes.
Seasoned Legal Advice and Representation For Your New Jersey Divorce or Family Law Matter
If you need considered legal assistance with divorce, paternity, child custody, premarital agreements, child support, alimony, or other family law matters in New Jersey, contact the Union offices of family law attorney John B. D’Alessandro at 908-964-0102.