October 18, 2010 12:00 am

No Deduction for Legal Fees to Reduce Alimony Payments

Legal fees to receive alimony are deductible, but apparently legal fees to keep income by not paying alimony are not. That’s what the Tax Court told an engineer in California who incurred $13,574 in legal fees to have a court reduce the amount of spousal support that he had to pay to his former wife.

The tax rule is that legal fees incurred in connection with a divorce generally are a nondeductible personal expense. Legal fees paid for the production or collection of income are tax deductible. Whether legal fees are nondeductible or deductible depends on the origin of the claim.

In this case, the engineer argued that his fees were incurred to “defend his income.” He also argued that his payments of spousal support “severely limited [his] ability to invest money that would have been income earning either as 401(k) monies or perhaps rental property or other business endeavors.” The Tax Court rejected his arguments because his legal fees were not incurred to create income but rather to retain it; his fees were not deductible.

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Tax Glossary

Deferred compensation

A portion of earnings withheld by an employer or put into a retirement plan for distribution to the employee at a later date. If certain legal requirements are met, the deferred amount is not taxable until actually paid, for example, after retirement.

More terms