When it comes to unpopular subjects, I can think of no two things that come to mind faster than Family law and taxes. Were those subjects come together there is today's blog post from the Law Office of Bryan Fagan. I am going to share with you our thoughts on Whether or not it is possible to deduct your attorney’s fees on your federal taxes and what other considerations you may need to make when it comes to taxes and your divorce situation.
We all know that divorce cases can become expensive. Not only do you have to contend with attorney’s fees, court costs, and being away from work but you may also incur expenses that are new because of your divorce case. For example, if you are the non-primary parent of your children then it is possible that you could be in line to pay both child support and spousal maintenance. With that said, you need to save money where you can. Being able to save money on taxes may not be the most exciting way to save a dollar but it can be effective.
What would your motivation be to claim divorce attorney expenses on your taxes?
For the most part, you can expect that you and your spouse will each pay where you were attorney’s fees in your divorce case. A single attorney cannot represent both spouses and divorce. As a result, You and your spouse will not be able to share an attorney for your case. Additionally, having an attorney for your divorce case is very important. My reasoning for this is that you can have an attorney available to you to negotiate on your behalf in terms of dividing up possessions in your case as well as helping you negotiate a well-thought-out plan for custody and conservatorships of your minor children. These are all skills that the attorneys with the Law Office of Bryan Fagan possess.
Additionally, you are probably familiar with how divorce cases can sometimes take months to complete. In Texas, the minimum length of time a typical divorce case can last is 60 days from the date of which your divorce is filed. this is intended to provide you and your spouse with a cooling off. Where you all can consider whether you want to get divorced. Otherwise, a standard divorce in Texas takes between four and six months to complete itself. This is important because in a divorce case time equals money.
The longer your case the more money you end up paying to your attorney. Family law attorneys bill by the hour which means that the more time spent working on your case the more you may end up having to pay in attorney’s fees. So, the result is that you need to be sure the work being done on your case is essential. The last thing you want is for your case to take longer than necessary to complete due to delays in getting documents filed, missed deadlines, or anything else that is unnecessary to complete your case fairly and timely.
Given that attorney’s fees may end up being the most significant part of your budget associated with your divorce it is reasonable to want to know how you can take those expenses and claim them in some way on your taxes. Not having to pay income tax on these attorney’s fees would be one way to limit their impact on your bottom line. There is nothing illegal or immoral about doing this. If there is something in the tax code that allows you to write off these expenses, then you should certainly investigate doing so. Otherwise, this would be a missed opportunity for you and your family.
Before 2017 it may have been possible for you to claim certain attorney’s fees related to your divorce during your taxes period however, the tax cuts and JOBS Act change that designation. From 2018 forward the deduction types and amounts that you could claim on your tax return changed. Since then, people in your position who have gone through a divorce have not been able to deduct attorney’s fees under the current version of the tax code. While this may not be welcome news for you as you begin a divorce case it is important to understand what the limitations are under the tax code.
While it is important to learn general concepts under tax law you should consult with your tax preparer or accountant to learn more about how the change in laws could affect you on a personal level. The Law Office of Bryan Fagan are not tax attorneys, nor do we make ourselves out to be. However, this is a relatively commonly asked question that we receive, and we wanted to take the opportunity to share this information with you. It should not, however, be taken as tax advice or anything that you should rely upon from a legal perspective.
The bottom line is that the IRS does not allow you to deduct any costs related to your legal situation which may even extend the situations that go beyond your divorce case. Additionally, counseling that you may have received in your marriage or for family purposes can also not be deducted. Finally, legal representation during your divorce case can also not be deducted from your taxes.
What should all of this tell us? The first is there is no tax advantage way to hire an attorney. While hiring an attorney may be a great decision for you and your family and may ultimately save you money or put you in a better position as far as your divorce orders it still does not mean that you can deduct this money on your taxes. The money you spend on an attorney is seen as personal spending just like the money you spend on going to the grocery store, buying clothes, or going on a vacation. Just because the spending is related to a legal matter does not necessarily change the nature of the money spent.
Are there any exceptions to the rule that attorney’s fees in a divorce cannot be deducted from your taxes?
As with anything else when it comes to your taxes these are highly specific situations that may result in you being able to deduct attorney’s fees from your taxes period however, these are all very fact-specific and you should not rely upon this blog post as a way for you to gain specific legal knowledge regarding taxes or tax implications for you and your family. You should consult with your tax professional rather than relying specifically upon this blog post and the information contained therein.
However, several situations could potentially lead to your being able to deduct attorney’s fees on your taxes. The key to all of this is being able to itemize your deductions rather than take a standard deduction. You can itemize your deductions on your tax return if the miscellaneous deductions account for more than two percent of your adjusted gross income. These deductions combined must be more than 2% of the money that you earned that year which is taxable. If you earn an average wage and have been going through a divorce for an extended period, then this could be a likely position for you to find yourself in. On the other hand, high-income earners or people who had relatively short and inexpensive divorces likely do not position themselves to pass this test. However, let's assume that you do find yourself in a position where these itemized deductions account for more than two percent of your adjusted gross income. Here is what we can talk about regarding deducting attorney’s fees on your tax return.
One of the first examples that I can think of when it comes to deducting expenses related tier divorce on your taxes would be if you are a small business owner. One of your major concerns because of the divorce may be related to how the divorce will impact your business. If you are paying fees for tax planning that will help you think ahead to how the divorce will affect your business, then you may be able to deduct these costs as an itemized deduction. Many times, you may have a team of individuals, such as a certified public accountant, who can give you advice on how to determine how you may want to divide property in the divorce. This is especially important if you and your spouse run a business together. You can take those fees and deduct them from your taxes since they are closely related to the operation of your small business.
On the other hand, financial advice that you would get from a certified public accountant or certified financial planner cannot be deducted from your taxes if they relate only to issues related to your personal life. For example, determining how to divide the equity in your home, retirement savings or any other personal financial matter cannot be deducted from your taxes. Again, it will be only property that is related to your business that can be deducted from your taxes if you itemize your deductions.
Next, you may also be in a position where you are trying to get taxable income to declare on your income tax return. This would be where you are if you are trying to earn spousal maintenance or child support because of being the primary conservator of your children. In that case, the fees that you can pay because of trying to earn those benefits could be individually deductible on your tax return. This used to be a fairly straightforward matter; however, the tax cuts and JOBS Act removed the need for a spouse receiving alimony to report that money as income. If this is the position that you find yourself in, you should speak to your attorney and tax professional about this. It is always a wise idea to consult with your tax professional even if you cannot ultimately deduct those costs on your tax return.
Issues regarding retirement savings are not typically at the top of anyone's list of most exciting items in a divorce but they can be very important to your case. As such, you and your spouse may spend a fair bit of time attempting to work out a plan as to how your retirement account will be divided between the two of you. Depending on your age and the length of your marriage the amount of money in these retirement accounts can be quite substantial. As a result, you will not want to disregard these retirement plans simply because your mind is focused on other issues. The quality of your life after the divorce and as you transition into your golden years will depend in large part upon how these accounts are divided during the divorce itself.
With all of that being said, you may be able to deduct on an individual basis the fees that you pay your attorney for Being able to earn a portion of your spouse’s retirement plan in the divorce case. Many times, especially in the event of a long marriage the retirement funds in one of these accounts can be quite substantial. As a result, it may be your wish and indeed the necessity under the law for that account to be divided between you and your spouse. As such, any fees that are associated with dividing this account could be itemized and then deducted during your taxes period however, you would need to be able to have proof if you are audited by the IRS.
This is where having a team of individuals to assist you in your divorce is essential to achieving success. The older we get the likelihood of your having greater wealth and assets to divide becomes even more likely. As such, it would not be wise to attempt to go about this division process all on your own. Rather, I would recommend that you work with not only an experienced family law attorney but an experienced financial professional who can walk you through these circumstances related to your case. Again, do not lose sight of the fact that there are opportunities for you to gain small advantages in your divorce.
a divorce is not what movies or television make it out to be. Rather, divorce cases are made up of small advantages that people gain through diligence throughout a relatively long case. Most divorce cases do not wind up in court with the judge making sweeping pronouncements or attorneys winning or losing a case in one court appearance. Rather, you can expect to have a good result in your divorce if you and your attorney are diligent and well prepared throughout the case. Many times, the small advantages that you gain through proper preparation will outpace any degree of issues that you encounter in more high-profile environments like mediation or hearings.
What to do about a spouse who is increasing the cost of divorce without just cause
Finally, I would like to address an issue that comes up from time to time in Texas divorce cases. Unfortunately, we cannot guarantee that your spouse will act honorably and ethically during your divorce case. For example, he or she may attempt to increase the costs of your divorce to bring you to the settlement table that much faster. This is especially true if he or she has greater access to money than you do or even has a family member who is paying for their attorney’s fees. In that case, your spouse may be motivated to try and put you in a position where you financially are unable to proceed with the case as you would like.
Rather than take this lying down you should approach your attorney at the first instance that you suspect that your spouse is attempting to bleed you dry in terms of money. Your attorney can address this directly with their opposing counsel and determine whether the attorney on the other side believes that this is going on. If he or she does not think that way, then your attorney can attempt to address that directly with the judge. Setting your case for a hearing on the matter is a good investment to bring these issues to light in front of the judge. If nothing else, the judge can address the problems directly and set your case for mediation or otherwise attempt to expedite hearings or trial dates if necessary. However, fees associated with your spouse attempting to increase divorce costs cannot be deducted from your taxes period
Questions about the material contained in today's blog post? Contact the Law Office of Bryan Fagan
If you have any questions about the material contained in today's blog post, please do not hesitate to contact the Law Office of Bryan Fagan. Our licensed family law attorneys offer free of charge consultations six days a week in person, over the phone, and via video. These consultations are a great way for you to learn more about the world of Texas family law as well as about how your family circumstances may be impacted by the filing of a divorce or child custody case.