All legal fees related to employment or discrimination settlements qualify for tax deduction as "qualifying legal fees" also known as "Above the line deductions" per IRC Section 62. To deduct qualifying legal fees:
Go to Forms > Schedule 1, line 8, Z > Line z2b: enter gross amount from 1099-misc box 3 > Line z12: enter your legal fees as negative number. For example, enter: "-$18,000". Add description "qualifying legal fees (IRC Section 62)".
Here is the list of categories of plaintiffs that qualify for legal fees deduction: https://www.woodllp.com/Publications/Articles/pdf/12_Ways.pdf
If you did not deduct your qualified legal expenses, you may be able to amend the prior tax return and obtain a refund.
Carl, you wrote "and there is no deduction from that income for legal fees at all." This is wrong. The employee was paid their settlement as W2 wages or back pay, and this is evidence that the settlement was employment related. Therefore the legal fees are eligible for tax deduction as "qualified legal fees".
How many people followed your advice and did not deduct their qualified legal fees? How many people have you discouraged from deducting their legal fees? This is very concerning that Turbotax gave you the "Verified Expert" status.
