Legal fees you paid for a divorce are considered personal expenses. You may only deduct legal fees related to doing or keep your job. However, you may be eligible to deduct attorney fees associated with receiving alimony or receiving property.
Beginning Jan. 1, 2019, alimony or separate maintenance payments are not deductible from the income of the payer spouse, or includable in the income of the receiving spouse, if made under a divorce or separation agreement executed after Dec. 31, 2018.
If you were awarded money from a legal settlement or case, it's likely that the award amount will be taxable and should be included in your gross income reported to the IRS. Generally, the only exception is if the money was awarded to you as a result of a lawsuit for physical injury or sickness.
Your marital status at the end of the year determines how you file your tax return. If you were divorced by midnight on December 31 of the tax year, you will file separately from your former spouse. If you are the custodial parent for your children, you may qualify for the favorable head of household status.
Primary Residence If you sell your residence as part of the divorce, you may still be able to avoid taxes on the first $500,000 of gain, as long as you meet a two-year ownership-and-use test. To claim this full exclusion, you should make sure to close on the sale before you finalize the divorce.
Exceptions include legal fees in connection with an employment discrimination lawsuit and any amounts earned in connection with whistleblower suits. Businesses may continue to deduct legal and professional fees if those fees were incurred in the course of conducting business.
For 2021, Schedule 1 to Form 1040 gives you two lines. Line 24(h) and 24(i) of Part II, Adjustments to Income. Why worry about deducting legal fees in the first place? Most plaintiffs would rather have the lawyer paid separately and avoid the need for the deduction.
Generally speaking, any settlement or judgment amount you receive as compensation for lost income is subject to income tax. The reasoning is that your original income would have been taxable had you not suffered the income loss, so any compensation intended to replace that same lost income should be taxable as well.