The general rule is that personal expenses are almost never deductible by taxpayers on Schedule “A” (Itemized Deductions) of their personal returns. But all rules have exceptions and almost everyone is familiar with the deductions available for medical and dental expenses. These are great deductions but with this hitch. You only get to deduct the amount that exceeds 7.5% of Adjusted Gross Income. Thus, it takes some pretty catastrophic medical expenses to get past the threshold.
But there are two lesser known deductions that merit some attention. Under Section 212(1) of the Internal Revenue Code, a taxpayer may deduct expenses directly attributable to the production or collection of income that is taxable. Spousal support and alimony is taxable income and both the Tax Court and the Internal Revenue Service agree that counsel fees attributable to the determination and collection of spousal support and alimony are proper deductions under Section 212. This includes proceedings to collect arrearages (overdue amounts) and to increase alimony payments. The deductions apply only to the payee. The payor does not qualify for a similar deduction in defending these claims.
The fees must be reasonable for the goal sought. Thus a $10,000 deduction to secure a $9,000 increase may be subject to challenge. The deductions for legal fees are also limited to those greater than 2% of adjusted gross income. Thus if an otherwise unemployed spouse incurred $10,000 in fees to secure an award of $3,000 a month in alimony, her adjusted gross income of $36,000 per year means that the first $720 (2%) of counsel fees are not deductible. The deduction is taken on Schedule “A” under “Job Expenses and Certain Miscellaneous Deductions” (lines 21-27 for 2014).
The second and more nebulous area where deductions may be taken is for “Tax Advice.” Section 212 (2) of the Internal Revenue Code allows deductions for “the management, conservation or maintenance of property held for the production of income.” This is a far trickier deduction as there are no Treasury Department regulations directly addressing it. The regulations under Section 212(1) inform us that investment management fees and custodian fees associated with investments are deductible. The same costs for a personal residence are not. Expenses of estate litigation are afforded deductibility even though not directly related to production of income. Expenses incurred in asserting rights to property are non-deductible. But if the property produces income and the claim is related to collection of a portion of it, that “income” portion is deductible. Expenses associated with preparing tax returns are deductible but again the deduction is for expenses beyond 2% of Adjusted Gross Income. The general view (not found in the regulations) is that “tax advice” secured for purposes of managing one’s investments is deductible and many divorce practitioners sometimes freely “allocate” a substantial portion of their invoice to “tax advice” to help a client out. But, this is a slippery slope for both the adviser and the tax payer because unlike the alimony deduction, there is no real means to measure what is reasonable and what is not and to a large degree, the assets being allocated in the divorce are not income producing.