The tax advantages of claiming the children can be and are frequently negotiated by the parties in custody settlement agreements or Parenting Plans.
Attorney's fees incurred in a family case are personal expenses and not tax deductible. There are a few exceptions. Attorney's fees and other litigation costs are deductible to the extent they are incurred to produce or acquire taxable income. Because spousal support is taxable income, fees incurred to obtain it are deductible. Attorney's fees incurred to obtain other taxable income, like an interest in a pension or retirement plan, royalties, a portion of a business, and etc., may also be tax deductible. Fees incurred in establishing or defending title to property may be capitalized and added to the basis of property. Fees are also deductible to the extent they are paid for tax planning advice.
In the event the IRS disputes deductions of attorney's fees or litigation expenses in a domestic relations case, the taxpayer will need an allocation letter from his or her attorney that expressly itemizes the deductible and non-deductible fees and expenses.
Child-support is not taxable income to the "Obligee/Payee" (the person receiving it), and is not tax-deductible to the "Obligor/Payor" (the person paying it). Spousal support is the opposite. Spousal support is taxable income to the recipient. The person paying it can deduct.
At The Childress Law Office, we look for ways to benefit clients with tax and estate planning issues. Sometimes, for example only, tax planning can be done by using the tax deductibility of attorney's fees to allocate them between spouses. If (by way of example only) Husband pays to Wife $25,000 as spousal support and Wife pays her attorney's fees from this money, Wife may be able to deduct a significant portion of her fees and both parties benefit. Doing the property agreement this way gives the Husband incentive to pay Wife's legal fees and expenses by making them tax deductible as spousal support. This is just one example and for purposes of illustration only.
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