A tax deduction is an allowance whereby the IRS allows you to reduce your total taxable income by a certain amount because of some event.
By allowing tax deductions, the United States tax code is encouraging certain behavior by removing the tax penalty associated with that behavior. For example, the interest on a mortgage payment or the expenses of running a business are all tax deductible.
Maybe the government cares after all?
The law regarding tax deductions and expenses is as follows:
“In the case of an individual, there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year—
(1) for the production or collection of income;
(2) for the management, conservation, or maintenance of property held for the production of income; or
(3) in connection with the determination, collection, or refund of any tax.” 26 U.S. Code § 212
The United States Supreme Court answered this question in 1963 by stating that the issue turns on whether “litigation costs [are] a “business,” rather than a “personal” or “family,” expense” United States v. Gilmore, 372 U.S. 53, 1963
The United States Supreme Court went on to say “the characterization, as “business” or “personal,” of the litigation costs of resisting a claim depends on whether or not the claim arises in connection with the taxpayer’s profit-seeking activities.” United States v. Gilmore, 372 U.S. 53, 1963
The lawyer’s fees will not be deductible If the spouse’s “claims stemmed entirely from the marital relationship, and not, under any tenable view of things, from income-producing activity” United States v. Gilmore, 372 U.S. 53, 1963
Furthermore, IRS documents have subsequently advised that “[g]enerally, attorney’s fees and other costs paid in connection with a divorce, separation, or decree for support are not deductible by either the husband or the wife.” Sec. 1.262-1(b)(7), Income Tax Regs.
But, parts of your divorce may be tax-deductible. “[A] deduction for legal expenses is not necessarily precluded simply because the taxpayer’s underlying claim arose in a divorce action” Barry v. COMMISSIONER OF INTERNAL REVENUE, 2017 TC Memo 237 – Tax Court 2017
“[T]he legal fees in issue which represented the cost to petitioner of producing monthly alimony payments, which were included in her gross income, are deductible under section 212(1) as ordinary and necessary expenses paid or incurred during the taxable year for the production or collection of taxable income.” Wild v. Commissioner 42 T.C. 706 (1964)
While legal fees to collect alimony are deductible, legal fees to reduce alimony are not. “[A]ctions to resist or reduce alimony obligations are nondeductible personal expenses” Barry v. COMMISSIONER OF INTERNAL REVENUE, 2017 TC Memo 237 – Tax Court 2017
Back in 1964 and even in 2017., alimony was taxable to the alimony receiver. Since 2018, alimony received is no longer taxable income.
Gross income no longer includes “a sum which is payable for the support of children of the payor spouse.” 26 U. S. Code Section 71(c)(2)
So, I’m not sure if divorce lawyer fees relating to alimony would still be tax deductible under today’s law.
If a divorce is associated with a business’s income, expenses related to that business’s income can be tax deductible.
“[W]e see no reason why the same principle should not apply to legal costs of securing rights to other forms of income, even though not designated as alimony” Hahn vs. Commissioner, 35 T.C.M. 509 (1976)
“[W]hat was sought and what was awarded petitioner in connection with the…property seems clearly in the nature of income, as opposed to an ownership interest. Accordingly, to the extent that petitioner’s legal fees related to this aspect of the litigation they are deductible under section 212 as expenses related to the production of taxable income” Hahn vs. Commissioner, 35 T.C.M. 509 (1976)
This requires a distinction between an asset and the asset’s income. Legal fees in regards to the division of the asset are not tax deductible while legal fees associated with an asset’s income are tax deductible
Additionally, a divorce will involve one spouse taking measures to protect their business from the other spouse’s machinations via protective order. Legal fees associated with defending a business from a spouse are deductible. A tax-payer is “entitled to deductions, including pass-through deductions, for the portion of the legal fees relating to the protective order” Liberty Vending, Inc. v. Commissioner, T.C. Memo. 1998-177.
But wait! There’s a big caveat to everything I just wrote. No expenses are allowed AT ALL until 2026 under the current tax code.
“[N]o miscellaneous itemized deduction shall be allowed for any taxable year beginning after December 31, 2017, and before January 1, 2026.” 26 U.S. Code § 67(g)
So, if you’re reading this article and it is not the year 2026 yet…there is no way you can deduct any of your divorce lawyer’s fees.
If you’ve read this far, you probably have an eye for detail and appreciate other people with similarly obsessive professional interests. So, let’s chat! Contact my Chicago, Illinois family law firm to speak with an experienced Chicago divorce attorney.