Deductions & credits

You can deduct legal expenses that are related to doing or keeping your job, such as those you paid to defend yourself against criminal charges arising out of your trade or business.

 - Employment cases. You may be able to deduct legal fees related to certain employment cases, such as a claim of unlawful discrimination, a claim against the U.S. government, or a claim made under the Social Security Act, as an adjustment to income. These fees are  NOT limited to 2% of your AGI or subject to phase-out for AMT purposes .

• In your open Federal return, choose the tab for Wages & Income
• Scroll down to Less Common Income and Show more
• Start/Revisit Miscellaneous Income and choose Other reportable income 
• Say Yes to continue to the screen "Other Taxable Income". Enter the description "Qualifying Legal Fees" and the amount as a negative number. 

A corresponding subtraction will be entered on Line 21 of your return.

“Above the line” deductions are set forth in Internal Revenue Code (“IRC”) Section 62 and are deducted against the taxpayer’s gross income to reach a lower Adjusted Gross Income (“AGI”). “Below the line” deductions are set forth in IRC Section 63 and are deducted against AGI to reach a lower taxable income. The “line” is set by the Adjusted Gross Income.

The standard deduction or itemized deductions are “below the line” deductions. Because legal fees based on claims that qualify for above the line deductions are deducted before taxpayers apply itemized deductions, the repeal of the miscellaneous itemized deduction has no impact on their deductibility.

a. Discrimination suits (especially employment claims) and attorney’s fees relating to awards to whistleblowers.

IRC Section 62(a)(20) and (21) allow a taxpayer to deduct costs involving discrimination suits and attorney’s fees relating to whistleblower awards. Specifically, under IRC Section 62(e)(18), unlawful discrimination is defined to include: “any provision of Federal, State, or local law, or common law claims permitted under Federal, State, or local law… regulating any aspect of the employment relationship, including claims for wages, compensation, or benefits, or prohibiting the discharge of an employee, the discrimination against an employee, or any other form of retaliation or reprisal against an employee for asserting rights or taking other actions permitted by law.”

Excludable fees include: (i) compensatory damages awarded under a pure physical injury case with no interest and no punitive damages; (ii) court awarded fees; and (iii) statutory attorney’s fees.

a. Discrimination suits or whistleblower awards

Taxpayers filing Form 1040 for 2018 wishing to take an “above the line” deduction for their attorney’s fees related to discrimination suits or whistleblower awards must attach Schedule 1. The deduction will be considered a “write-in” adjustment. The type and amount of the deduction must be reported on the dotted line of Schedule 1, Line 36, since no other line has been allocated to it (please consult with your tax specialist about how to properly identify the deduction as specific acronyms exist for different deductions). All deductions from Schedule 1 will then flow to Line 6 of the taxpayers’ Form 1040.

b. Trade or business expenses

Taxpayers who do business as a sole-proprietorship for federal tax purposes wishing to deduct attorney’s fees as part of the business must attach Schedule C to their Form 1040 for 2018. Attorney’s fees incurred as an “ordinary and necessary” expense of the business can be deducted in Schedule C, Line 17.

c. State conformity to the 2017 Act

States generally rely on taxpayers’ federal taxable income to calculate how much will be owed by them at the state level (with some adjustments).   It is recommended that taxpayers consult with an attorney or accountant before taking a position on what deductions are available to them in a state.