Discrimination Settlement

[75Wildcat]

I have 2 questions.  My wife received a discrimination employment settlement and received $40,000 in lost wages, etc. which was just entered as normal income on her W2. This amount was taxable.   The amount was not separated from her normal income.  Do I need to report that exact amount anywhere because it said in some tax law that the write-off of attorney fees need to be less than the settlement?  She also received $60,000 for waiver of claims against employer due to pain and suffering, which we did not receive a 1099 for because we were told that income was not taxable.   We are trying to write off the attorney fees ($34,750) because they told us that was possible.  Where do we enter all this information into Turbo Tax Deluxe (We have CD download version).   Thanks.

[RobertG]

Attorney fees for employment discrimination must be entered on Schedule 1 line 22 and identified as "UDC".

This is not supported by TurboTax but can be done with direct form entry  but only in the forms mode with the desktop versions. 

To switch form TurboTax online to the Desktop/Download version see this TurboTax website: How do I switch from TurboTax Online to the TurboTax software?

That is a calculation the TurboTax does not support.  See this TurboTax article:

https://ttlc.intuit.com/community/choosing-a-product/help/are-there-any-personal-individual-tax-situ...

19. Legal Fees for Unlawful Discrimination Lawsuits: This is not supported in TurboTax.

IRS form 1040 Schedule 1 line 22 instructions.

• Attorney fees and court costs for
actions involving certain unlawful discrimination
claims, but only to the extent
of gross income from such actions
(see Pub. 525). Identify as “UDC.”

Pub 525 page 30 says:

https://www.irs.gov/pub/irs-pdf/p525.pdf

discrimination suits. You may be able to de-duct attorney fees and court costs paid to re-cover a judgment or settlement for a claim of unlawful discrimination under various provisions of federal, state, and local law listed in section 62(e), a claim against the U.S. Government, or a claim under section 1862(b)(3)(A) of the Social Security Act. You can claim this deduction as an adjustment to income on Schedule 1 (Form 1040 or 1040-SR), line 22. The following rules apply.
•
The attorney fees and court costs may be paid by you or on your behalf in connection with the claim for unlawful discrimination, the claim against the U.S. Government, or the claim under section 1862(b)(3)(A) of the Social Security Act.
•
The deduction you're claiming can't be more than the amount of the judgment or settlement you're including in income for the tax year.
•
The judgment or settlement to which your attorney fees and court costs apply must occur after October 22, 2004.

This question was previously answered by macuser_22

[75Wildcat]

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.

[Opus 17]

---

@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.