Can I deduct my legal fees from my taxes?

People often want to know if they can deduct divorce-related attorney fees from their taxes.

Generally, the answer is no.

To understand why (and to appreciate when you can do it), it's helpful to know a bit about the U.S. Tax Code.

The U.S. government taxes income. For most people, income is what they earn from their job. However, not all earned money is taxed. Many people contribute to retirement accounts (like 401(k)'s) and get deductions.

The same is true for money spent on business expenses. If a business earns $100,000, but it costs that same business $75,000 to earn the money, taxes are paid only on the $25,000 gain.

Personal expenses are generally not deductible because they are not "income producing" activities.

While this explanation is greatly oversimplified, it does explain why tax deductions are generally allowed for income producing expenses but disallowed for personal expenses.

With regard to divorce-related attorney fees, the U.S. Tax Court has held that the fees are "personal" because they would not have existed but for the parties' marriage, which is not inherently an income producing activity. See United States v. Gilmore, 372 U.S. 39 (1963).

Bummer.

However, two important exceptions do exist.

First, attorney fees paid for divorce-related tax planning are deductible. Conceivably, this could include situations where taxes associated with a divorce are discussed.

Second, attorney fees paid to obtain taxable income (such as spousal support or income from a pension plan, but not child support) are deductible. See I.R.C. Section 212(1) & (3); Treas. Reg. Section 1.262-1(b)(7); Wild v. Comm'r, 42 T.C. 706 (1964).

In most situations, these expenses must be classified as "miscellaneous itemized deductions" which limits their usefulness.  Also, legal fees are generally not deductible for purposes of the alternative minimum tax. See I.R.C. Section 56(b)(1)(A)(i). The cost of obtaining an income producing property or business should be capitalized. See Serianni v. Comm'r, 80 T.C. 1090 (1983).