Deductibility of Attorney Fees? Time to call your CPA?

Here are several interesting facts regarding the ability to offset or recoup divorce legal fees. This firm doesn't advise clients on tax issues but nonetheless we are glad to give our clients the foothold of knowledge necessary for them to ask their accountants about these prospective tax savings:

  1. Legal fees for divorce actions are not deductible expenses in their entirety.
  2. Under the U. S. Internal Revenue Code § 212(1), legal fees incurred in attempting to secure income, which are miscellaneous itemized deductions, are deductible to extent that miscellaneous itemized deductions in aggregate exceed two percent of adjusted gross income.
  3. Under I.R.C. §212(3), legal fees for tax advice, which are miscellaneous itemized deductions, are deductible to extent that miscellaneous itemized deductions in aggregate exceed two percent of adjusted gross income.
  4. A portion of legal fees incurred in connection with property acquisition may be allocated to capital basis of property.
  5. Under Taxpayer Relief Act of 1997, if business entity pays attorney fees on behalf of individual, that entity must file an information return with IRS.