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Miscellaneous tax questions concerning divorces

In our last post, we reviewed the income tax consequences for persons in Tennessee of an order for dissolution of the marriage that requires one spouse to pay alimony to the other. In this post, we want to cover several miscellaneous tax topics regarding divorce that do not by themselves justify a full post.

Perhaps the most important point involves child support. Unlike alimony, child support is neither taxable to the recipient nor deductible by the payor. Period. That’s all.

What about the expense of obtaining the divorce? Legal fees paid for the purpose of obtaining a divorce or resolving issues such as child support are not deductible. Legal fees paid to obtain and collect an award of alimony may be deducted if they are separately stated in the lawyer’s invoice. Also, legal fees paid for the limited purpose of obtaining advice about taxes are deductible. Legal fees paid in the course of a dispute over child custody are not deductible, but fees paid to determine the income tax consequences of selling a piece of property may be deducted. If the fees were paid to the attorney handling the overall divorce, the lawyer must segregate the charges in order that they may be deducted. Fees paid to accountants, appraisers and others who provide advice on asset valuation may be deductible if they are related to tax questions. All such deductions are capped at 2% of the taxpayer’s adjusted gross income.

Virtually no other fees paid in connection with a divorce are deductible. Certain incidental costs, such as the cost of preparing and filing a deed to transfer property to the taxpayer’s ownership may be added to his or her basis in the property in question, thereby reducing taxable gain when the property is sold.

For persons with substantial wealth, consulting a lawyer who is knowledgeable about the tax consequences of divorce can protect against unexpected tax consequences. Also, an experienced divorce lawyer can help devise methods of dividing property in ways that can minimize taxes.