We are not sure of your exact situation. Under current tax laws, legal fees related to settlements are not deductible in many situations and thus you may be taxed on the gross settlement.
Legal fees that are deductible
In general, legal fees that are related to your business, including rental properties, can be deductions. This is true even if you didn't win the legal case in which the legal fees were incurred.
For instance, according to the IRS, you can deduct:
- fees that are ordinary and necessary expenses directly related to operating your business (should be entered on Form 1040, Schedule C)
- fees for resolving tax issues, advice or preparation of tax forms related to your business (should be included on Form 1040, Schedule C)
- fees for rentals or royalties on properties for which you earn income (should be included on Form 1040, Schedule E)
- fees related to farm income and expenses (should be included on Form 1040, Schedule F)
Additionally, the following legal fees, although not associated with your workplace, are also deductible:
- fees related to adopting a child if you qualify for the federal adoption tax credit (should be included on Form 8839)
- fees related to whistleblower claims (should be included on Form 1040)
- fees related to unlawful discrimination claims (should be included on Form 1040)
Legal fees that are NOT deductible
Any legal fees that are related to personal issues can't be included in your itemized deductions. According to the IRS, these fees include:
- fees related to nonbusiness tax issues or tax advice
- fees that you pay in connection with the determination, collection or refund of any taxes
- personal legal expenses, including:
- child custody
- purchasing real estate
- breach of promise to marry
- civil or criminal charges related to personal relationships
- personal injury
- title preparation
- estate planning such as will preparation
- property claims or settlements
- divorce
- Fees for defending civil or criminal charges that arise from your participation in a political campaign
ask your attorney, if they refuse to provide an answer, you may need to consult a tax pro.
