You can usually deduct legal expenses that you incur in attempting to produce or collect taxable income or that you pay in
connection with the determination, collection, or refund of any tax.
You can deduct
legal expenses that are:
- Related to either doing or
keeping your job, such as those you paid to defend yourself against
criminal charges arising out of your trade or business,
- For tax advice related to a
divorce if the bill specifies how much is for tax advice and it is
determined in a reasonable way, or
- To collect taxable alimony.
If the attorney fees
are not for one of the purposes (divorce, for example), the legal fees are not
deductible.
In your case, it appears the question turns on whether the dispute could lead to the collection of taxable income. If the disability award is taxable income to you, then the legal fees are deductible. It's not relevant whether the dispute ended up in court.
