Tax rules regarding legal and professional fees can be complex and sometimes disappointing.
Complex since there are certain legal and professional fees for which you can get an immediate tax write-off. In other cases, you can add these expenses to the cost of the relevant item and write it off over a longer period of time. Disappointing because some aren’t deductible at all, and oftentimes they are only beneficial as a deduction when they exceed 2% of your adjusted gross income. Here’s what you should know:
Rules About Deductions for Divorce and Spousal Support
Most costs related to divorce or separation are not deductible by either the husband or the wife because they are considered personal expenses. Legal fees related to obtaining child support, a property settlement, or fees that you may have been ordered to pay or volunteered to pay for your former spouse are not deductible. Pre-nuptial and post-nuptial agreement fees are also not deductible.
Legal and other professional fees for the time and expenses related to spousal support are generally deductible but only by the recipient of spousal support and when attributable to the production and collection of amounts included in their gross income. If your attorney details in their bills to you the amount of time spent and their charge for working on the issue of spousal support, you can deduct this part of their fees. Other professionals, such as a certified divorce financial analyst, may also weigh in on decision-making about spousal support. You may also get tax advice on your divorce; those fees would be considered deductible, too.
Deductions for Other Purposes
People often incur professional fees for tax preparation. These fees—including tax software program fees, e-filing costs, tax publication costs, appraisal fees, and tax advice—are all deductible.
Another common expense that is deductible is payment for investment advisors’ fees. Other deductible expenses include legal fees related to producing or collecting taxable income. For example, if you had to use an attorney to collect a payment from a company, those legal fees would be deductible.
On the other hand, trustee fees for your IRAs and simple retirement plans are going to be deductible only if you actually pay them with separate money outside of those plans. Otherwise, the money that comes directly out of those plans to cover any fees is just a deduction in the future distribution. Estate planning fees are also not deductible.
To ensure that you understand what you are paying for and can document any deductions you choose to take, ask your attorneys and other professionals to do detailed breakdowns of their fees in all of their invoices.
For more expert advice on tax implications for legal and professional fees, contact me at firstname.lastname@example.org.
Susan A. Moussi, CPA, CFP®, CDFA, CFT SMD Tax & Divorce Financial Planning Consultants, Inc.
Phone: 614.429.4172 email@example.com