Would you pay your ex-spouse’s legal fees if you couldn’t deduct them?

Divorces are often traumatic.  Aside from the obvious emotional and social impact, divorce has the potential for severe economic/tax ramifications.

One divorce tax aspect entails one spouse’s payment of the other’s divorce attorney fees.  Usually a party’s willingness to pay those expenses is predicated on the existence or absence of a tax deduction for that payment.  Federal tax law classifies payments to the other spouse as either “property settlements” (non-deductible) or alimony (deductible).  Conventional tax wisdom classifies all payments not qualifying as “alimony” as non-deductible property settlements.

A recent tax court case highlights this trap for the unwary.  A husband was ordered to pay his ex-wife’s divorce attorney fees eighteen (18) months following the divorce judgment. As expected husband paid the fees and then attempted to deduct the payment as alimony on his tax return for the year in which the payment was made.  The order and statement of facts were each silent on the continuation of the attorney fee payment obligation following the ex-wife’s death.

Alimony exists if the payment is in cash and—

• The payment is made/received under a divorce or separation agreement (the “Divorce Documents”),
• The Divorce Documents don’t designate the payments as ones not includible in the recipient’s income,
• The spouses do not live in the same household at the time of the payment, and
• The obligation to make the payment ends with the recipient’s death.

The Tax Court duly noting this “alimony” definition held—the attorney fee payment(s) were not “alimony” because the obligation to pay such fees did not terminate on the wife’s death.

If you or someone you know is in the thralls of a divorce, it’s an excellent time to have your Holbrook & Manter representative review the Divorce Documents so the party paying the fees does not incur similar unintended results.