@75Wildcat wrote:
Do I need put any amounts anywhere else into Turbo Tax? How will the IRS know that the amount we are claiming in legal fees is less than the settlement amount? The W2 does not show anywhere the amount that is due from her settlement. Thanks.
The Expert missed a key part of your question.
Settlement amounts for lost wages are taxable as if they were regular wages and should be reported on a W-2. So far so good.
Settlement amounts for pain and suffering are not taxable if the pain and suffering was due to a physical illness or injury, but are taxable if the pain and suffering was caused by something that was not a physical illness or injury, such as discrimination. See https://www.irs.gov/pub/irs-pdf/p4345.pdf
You don't say what the pain and suffering is for, I will assume for now that it is part of the same discrimination claim. Tell me if it was something else.
You can reduce the amount of the pain and suffering award by any amounts you spent on medical care (including therapy) for the pain and suffering. For example, if you received $60,000 for pain and suffering and spent $5000 on therapy, you can exclude the $5000 but must report the other $55,000 as taxable income.
The taxable amount of the pain and suffering award is entered as "other income" in the Other Uncommon Income section. You do not need to provide calculations or supporting documents, but you must keep those documents in case of audit for at least 3 years.
Then, your legal fee deduction is determined by the taxability of the income. You spent $35,000 in legal fees for a total of $100,000 settlement. If we assume that $5000 of the judgement is not taxable (5%), then you can only deduct 95% of the legal fees. If for some reason you determine the entire pain and suffering award is not taxable, then because only 40% of the settlement is taxable, you can only deduct 40% of your legal fees. (Likewise if 100% of the settlement is taxable you can deduct 100$ of the fees.) You report legal fees for discrimination cases using the manual entry method described by the expert, which can only be done in Turbotax installed on your own Mac or PC, and not on the web version.
Again, you don't need to submit proof of how you calculated the deduction, but keep the proof with your other important tax papers for at least 3 years.
