AlabamaFamilyLawBlog.com » Taxes

Are the fees I pay my divorce lawyer deductible?

Alabama Divorce Lawyer, Jim Jeffries — Fri, 24 Apr 2009 18:48:12 +0000

Only those fees paid to your divorce lawyer that are directly attributable to tax advice and/or related to the production of taxable income (such as alimony) can be deducted.

You may want to ask your lawyer at the conclusion of the case if she can give you a breakdown of what portion of the fee you paid her, if any, was related to tax advice or the production of taxable income. If the case does not involve alimony or other tax issues (for example, the sale of a house or stocks or the division of a retirement account), you may not be able to deduct any of the fee.

If you have specific questions related to this issue in your case, talk to your lawyer or tax advisor.

Divorce and Taxes

Alabama Divorce Lawyer, Jim Jeffries — Fri, 24 Apr 2009 18:12:38 +0000

The law firm of Ullman and Allen recently posted their Top Ten List of tax issues in divorce. The failure to consider the tax ramifications of a divorce settlement is one of the biggest mistakes made by parties and even their lawyers. #10 on their list is “Get professional advice.” I echo that and suggest that often that means getting your divorce lawyer together with your CPA to analyze potential tax consequences of a proposed divorce settlement. Thanks to Grant over at the Kansas Family and Divorce Law Blog for pointing me to the list.

Tax Time Tips for Newly Divorce/Separated

Alabama Divorce Lawyer, Jim Jeffries — Fri, 24 Apr 2009 17:37:44 +0000

It is time to start thinking about getting tax returns filed. This article contains ten tips for tax payers who have recently separated or divorced. It covers all of the basics including filing status, tax credits, etc.

Also, if you want more in depth information, go to www.irs.gov and download publication 504, the tax guide for Divorced and Separated Individuals. Or you can access a pdf version here.

Signing a Joint Return? Read This First

Alabama Divorce Lawyer, Jim Jeffries — Fri, 24 Apr 2009 17:33:23 +0000

A March 15, 2006, Wall Street Journal article points out the difficulty that spouses and former spouses are having in seeking Innocent Spouse Relief from the IRS. When you sign a joint income tax return with your spouse, you and your spouse are jointly responsible for the taxes, interest or penalties on those returns unless you qualify for innocent spouse relief. That means that under most circumstances, the IRS can collect the entire amount owed from either party.

When you claim the “innocent spouse” defense, you argue that you did not know and had no reason to know about any under reporting of income or other wrongdoing associated with the filing of the return and that therefore you should not be held responsible for paying any additional taxes, penalties or interest due.

According to the article the IRS has taken a renewed interest in enforcement, due in part to growing concern of the budget deficit. The article sites a recent report that states that of the nearly 50,000 innocent spouse claims received by the IRS in 2005, only 21% were allowed in full and another 8% were partially allowed.

The moral to the story: if you have even a hint of impropriety, do not sign a joint return. As a divorce lawyer, I would also add that if a divorce is imminent then before signing a joint return, talk to your lawyer about the implications first.

Note: I would link to the Wall Street Journal story but it is not available on wsj.com without a subscription. If you are a subscriber and have acces to the Journal online, you can go to the above link and do an article search for “Innocence in Tax Fraud” and it will pull up the article.

Also, you can download the IRS publication describing and explaining Innocent Spouse Relief here.

Katrina Relief – Extension to File Income Taxes

Alabama Divorce Lawyer, Jim Jeffries — Fri, 24 Apr 2009 17:31:49 +0000

The Internal Revenue Service recently issued a Notice (2006-20) which postponed deadlines for filing certain tax returns and the payment of taxes until August 28, 2006, for those affected by Hurricane Katrina.

The Notice applies to eleven Alabama counties, including Baldwin and Mobile counties. If you are considering utilizing this option, contact your tax advisor to make sure you qualify and that you properly “self identify” as a Katina victim as required under the Notice.

Periodic Alimony is Taxed

Alabama Divorce Lawyer, Jim Jeffries — Fri, 24 Apr 2009 17:30:33 +0000

This recent article from The Oklahoman revisits some of the tax issues arising from divorce cases. According to the article and to my surprise, there are many divorcing spouses that do not realize that periodic alimony is included as income for tax purposes (don’t there lawyers explain this to them?). So, because taxes are not withheld, they are surprised in April to find out they owe taxes on all of the alimony received in a given year. The percentage will obviously depend on the recipient’s tax bracket.

My suggestion is to take 25% – 30% of each alimony check received and put it in a separate “tax account” to be used only at tax time to pay this obligation. I also recommend considering an ING Direct online account for this purpose. This account is currently paying 4% APR, which is better than most bank checking or savings accounts, and the money is liquid. Additionally, you link the ING account with your normal checking account and it is easy to make transactions into and out of the account online.

Also remember that if you want more in depth information, go to www.irs.gov and download publication 504, the tax guide for Divorced and Separated Individuals. Or you can access a pdf version here.

If you have any questions about the implications your divorce case will have on your tax situation, discuss it with your CPA or tax planner. The time to have that conversation is before the divorce is finalized.