Your divorce proceedings have concluded and you have paid your final attorney fee bill. Wondering if any of those fees are deductible on your personal income tax return? The general rule is that a taxpayer may not deduct attorney fees incurred in connection with a divorce or separation because this matter is considered to be personal and the Internal Revenue Code does not permit the deduction of personal, living, or family expenses. I.R.C. § 262(a). However, there are exceptions to this rule that may allow you to deduct some of your legal expenses related to your divorce, so long as you plan to itemize your deductions and your total miscellaneous deductions exceed 2% of your adjusted gross income (AGI). If you do not itemize deductions or your deductions do not pass the 2% adjusted gross income test, then you cannot deduct these fees.
Alimony Related Legal Fees:
IRC §212(1) allows an individual to deduct ordinary and necessary expenses paid or incurred during the taxable year for the production or collection of income. A spouse seeking taxable income, such as alimony, may deduct a portion of their legal fees related to his/her alimony claim because alimony is includable in the recipient’s gross income. A spouse may also deduct legal fees and expenses associated with a modification of alimony or to collect alimony arrearages. Additionally, if a spouse seeking alimony incurs accounting fees relating to their claim for alimony those accountant fees may also be deductible. Fees incurred to hire a vocational expert, to the extent the fees relate to obtaining alimony, may also be deductible. In order to deduct legal fees relating to a claim for alimony, the alimony recipient should pay all deductible legal fees in one year.
It is notable that a party defending against an award or collection of alimony cannot deduct his or her legal fees, nor can either spouse deduct legal fees associated with the collection of child support.
Fees Related to Tax Advice:
IRC §212(3) allows an individual to deduct ordinary and necessary expenses paid or incurred during the taxable year in connection with the determination, collection, or refund of any tax. Some examples of advice that may be allocated to tax planning or production of income are:
- Tax advice concerning the rights to claim dependency exemptions;
- Characterization and treatment of alimony obligations;
- Costs of determining the adjusted basis of assets in the property settlement;
- Costs of obtaining advice regarding the tax consequences of divorce or separation instrument; or of gathering information for actual preparation of tax returns; and
- Costs of securing an interest in a qualified retirement plan (such as those paid to divide your and your former spouse’s defined contribution plans).
For legal fees incurred in connection with a divorce to be deductible, your attorney must determine what portion of the fee is allocable to tax advice as opposed to non-deductible advice or other services and render an itemized bill. According to IRS Revenue Ruling 72-245, the agency will accept a lawyer's allocation of his or her fee between tax and nontax matters where the attorney allocates primarily on the basis of the amount of time attributable to each, the customary charge in the locality for similar services and the results obtained in the divorce negotiations.
Note: This information is general in nature and should not be construed as tax advice. You should consult with your tax accountant
After months, or in some cases years, of negotiations and perhaps litigation, your divorce is final. You are exhausted emotionally and financially and are ready to put your divorce behind you. However, before you forget about the past there are important financial and legal documents that you need to review to make sure they reflect your current marital status. For example, unless you have agreed to maintain your ex-spouse as the beneficiary of your life insurance policy, you will want to update your beneficiary designation.
Five Things You Need to Know About Divorce and Applying for College Financial Aid
If you are separated or divorced and have children preparing to go or already in college it is important for you to understand how divorce may affect your child’s college financial aid. Lynn O’Shaughnessy wrote an article for CBS Money Watch, listing five things you need to know about divorce and financial aid.
Where the child primarily resides matters:
The parent with whom the child resides primarily should be the one to fill out the Free Application for Federal Student Aid (FAFSA), which is required when requesting college loans. The non-custodial parent’s income is irrelevant for financial aid purposes. If the child lives with both parents an equal amount of time, then the parent that has spent the most money on the child’s care would be the one to fill out the FAFSA.
Residency is determined based upon the date the FAFSA application is submitted:
If the FAFSA application is submitted on March 1, 2014 then you must look at the 12-month period between March 1, 2013 and March 1, 2014 to determine where the child primarily resided.
It does not matter who claims the child as a tax exemption or who pays child support:
The only time child support might become a factor is if the child spends equal time with both parents and the amount of child support paid is more than the other parent spends on the child’s care.
Remarriage can affect financial aid eligibility:
If the custodial parent remarries, the new spouse’s income and assets must be listed on the FAFSA. This could potential jeopardize a child’s eligibility for financial aid.
There are different rules for the CSS/Financial Aid PROFILE:
The PROFILE aid form treats divorce differently than the FAFSA. There are approximately 250 private schools that use the PROFILE aid form and typically they want financial information from both parents. How the information is utilized varies from school to school.
Thanksgiving Tips for the Newly Separated or Divorced
Thanksgiving is this week and you may be wondering how you will survive the holiday this year. Whether you are separated or divorced, the start of the holiday season can be overwhelming, but it does not have to be. In a recent Huffington Post article Denise L. Denois lists ten tips to enjoy the holidays post-divorce. These tips apply whether you are newly separated or divorced.
1. Don't compete with your ex.
2. Keep busy.
3. Think about your kids, and don't manipulate or guilt them into spending all of their time with you to the exclusion of your ex.
4. Be magnanimous.
5. Invent a new tradition.
6. Clean house. Cleaning can be cathartic, clear out the old and make way for the new.
7. Find acceptance.
8. Be creative and resist the urge to overspend during the holiday season.
9. Focus on others.
10. Focus on yourself.
For more information on coping with the holidays and ways to implement the tips above, as well as tips for adult children of divorce, read Hess Family Law Blog: Surviving the Holidays Part 2:: Thanksgiving.
Hess Family Law is proud to be one of the sponsors of the 2013 Preparing For Success Fall Forum.
The “Preparing for Success” Fall Forum is an all-day conference, designed to provide useful and practical information for high school girls headed for college and the workplace. The Montgomery County Women’s Bar Foundation designed, planned and has offered this program every November, beginning in 2001. The program offers workshops that address interviewing, resume writing, career choices, getting into college, and a section on helping young girls stay safe while in high school and also on the internet. The entire day is free of charge. Co-sponsors include the Montgomery County Commission for Women, the J. Franklyn Bourne Association, the Maryland Hispanic Bar Association, Montgomery College and Montgomery County Public Schools.
You can register here for this free program.
Julie and Pete are in their mid 50’s and have decided to divorce. Both are worried about the affect a divorce will have on their retirement. Julie fears that she may not be able to afford to retire and Pete has concerns that he may have to push retirement back several years. Both wonder if there is a way to divide their retirement assets with a minimal amount of financial damage. Marilyn Timbers, in her article 4 Divorce Mistakes That Can Derail Retirement, raises four issues that may affect Julie’s and Pete’s retirement after divorce.
Should Julie give up her interest in Pete’s retirement in exchange for keeping the marital home?
Often times a spouse believes it is better to keep the house rather than receive a portion of their spouse’s retirement. However, this is not always true. Julie needs to consider the cost of maintaining the home as well as its future value. If Pete’s retirement plan is well diversified, Julie may be better off receiving the retirement income. It is also important for Julie to consider the tax consequences of receiving either asset before signing an agreement.
Are all retirement accounts the same? How are the accounts impacted by taxes?
Pete believes that it is fair for each of them to keep their own IRA accounts because they have the same value. Pete has not considered the tax implications of this arrangement. While both accounts may have the same value, his IRA is a pre-tax account and Julie has a Roth IRA, a post-tax account. If they were to each keep their own account, the division would not be equal due to tax consequences at the time of withdrawal; Pete pays taxes at withdrawal and Julie does not. It is important for Julie and Pete to consider the value as well as the tax status of all of their retirement accounts.
If Julie needs cash should she take a withdrawal simultaneously with the rollover of retirement funds from Pete to her, or should she do it later?
Julie rolls her share of Pete’s 401(k) into her IRA immediately after divorce even though she needs cash to pay for divorce related expenses. If Julie withdraws funds from her retirement prior to age 59 ½ there is a 10 percent tax penalty; however since her share of Pete’s 401(k) is allocated to her under a Qualified Domestic Relations Order (QDRO), she is entitled to a one time opportunity to withdraw money from Pete’s 401(k) without owing the penalty. Once the rollover from Pete’s 401(k) into Julie’s IRA occurs, she will be subject to the ten percent penalty should she need to withdraw the funds early.
Should Julie decide to take all of Pete’s 401(k) in cash, rather than rolling over the funds into her own retirement account?
Although Julie has the ability to withdraw funds from her portion of Pete’s 401(k) without incurring the ten percent penalty, she should not withdraw more than she needs. While immediate cash will help Julie now, she may be sacrificing her retirement down the road. Julie needs to assess her current and future cash flow and determine how much she will need for retirement before she determines how much, if any, of Pete’s 401(k) she should withdraw rather than rollover into her IRA.
It is important for Julie and Pete to discuss these issues with both their legal and financial advisors before entering into an agreement with regard to dividing retirement assets.
Fall is in the air. Temperatures are dropping, leaves are changing and pumpkins are in abundance. For kids and many adults the best part of Fall is Halloween.
As a divorced or separated parent you may not get to be with your children on Halloween day or night. But that doens't mean you can't celebrate the holiday and the season. Now days there are so many events leading up to Halloween, and even afterward, that you can still celebrate and enjoy the festivities with your child. And, don't forget about fun at home seasonal activities.
My six year old son rides the school bus to school. He has been nervous about riding the bus. He has fears about what will happen if a responsible adult is not at the bus stop to pick him up in the afternoon. He is the only student at his bus stop, there are no other parents we can rely upon to help out if we are not at the stop. We've reassured him that the bus driver will not let him off the bus if his adult is not present. We've reassured him that the bus driver will take him back to his school, place him in after care and a responsible adult will pick him up from after care. We have cleared this plan with my son's bus driver. But, this is not the bus policy in the Montgomery County, Maryland public school system. If you children go to public school in Montgomery County, Maryland, read on about the county bus policy.
In July 2013, Governor O’Malley authorized a commission to review the current Maryland child custody system and to make recommendations for reforms to provide better outcomes for children and their families. The Commission is comprised of attorneys and legal leaders in Maryland such as Judges, Delegates, Senators, and Psychologists.
Currently Maryland does not have a statute that lays out the factors to be considered when making child custody decisions. Instead, Judges must rely on case law. The Commission will analyze how custody decisions are being made and study how to make them more uniform and fair.
Divorce Tips to Keep you on the Right Track
Newly separated people are often overwhelmed with anger, sadness, and the complexity of the issues in their divorce case that they make mistakes. A recent article by Michelle Rozen, The 5 Worst Mistakes People Make During Divorce, lists these mistakes and tips that may help you make the right decisions and keep you on track during your divorce.
1. Be Informed: The biggest mistake people often make is not knowing all of the facts. You cannot make informed decisions if you do not understand your rights and options. A good way to learn your rights and options is to consult with a family law attorney. Many times parties shy away from an initial consult because they falsely believe that this will commit them to the divorce process. Learning about the process upfront before things have progressed will help you avoid costly mistakes down the road.
2. Be Aware of What is Happening in your Case: You need to need to make informed decisions with your attorney. Do not let others make decisions on your behalf because you are not in a position to face the issues. At Hess Family Law, we suggest that you have regular contact with your attorney, and that you open mail received from your lawyer in a timely manner. Another way to stay informed is to check the court computer for any upcoming court dates.
3. Never Act out of Anger: It is very easy for a disgruntled spouse to have revenge on their agenda. But acting out of anger will not always get you the results you desire and may cost both of you in the long run. It is better to keep drama to a minimum and focus on the facts. If you are finding it difficult to handle your emotions, seek the assistance of a therapist. Don’t use the courtroom to deal with those emotions.
4. Don’t Settle for Less than You Need or Deserve: Make sure you understand as best you can what your expenses will be post divorce. Try not to settle for less than you need or agree to pay more than you can afford. A good attorney can assist you in negotiating a settlement that is fair and reasonable, and if negotiations fail, your will be better prepared for trial.
5. Don’t Lose Yourself: If you feel yourself becoming overwhelmed take a moment to breath. Surround yourself with experts, such as a family law attorney, therapist, and a financial planner, that can help guide your through the divorce process. With a bit of planning you can make good decisions, no matter how bad things may look.
For more divorce tips to keep you on the right track read "Don't Make These "Biggest Mistakes" in the Resources Section of the Hess Family Law Website.