Solved: Can a cash settlement of a retirement beneficiary lawsuit be used as a deduction?
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Can a cash settlement of a retirement beneficiary lawsuit be used as a deduction?

My ex-wife named me as sole beneficiary of her retirement account.  When she passed, her heirs sued me for the account.  We settled on my giving them a cash settlement of about half the nominal value.  Can this be used as a deduction?


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Level 15

Can a cash settlement of a retirement beneficiary lawsuit be used as a deduction?

Yes, these fees can be a deductible Sch A itemized deduction.  The reason is these are for the protection of income. 

Go to Deductions and Credits 

to "Other Deductions and Credits" 

to Legal Fees"

Below is the detail on why this is deductible and with links to the entire articles. 


"However, legal fees incurred by individuals may also fall into less favorable categories: personal, nondeductible expenses or miscellaneous itemized deductions limited by the 2%-of-adjusted-gross-income (AGI) limit for regular tax and not allowed for alternative minimum tax (AMT) purposes."

Source:  https://www.thetaxadviser.com/issues/2007/oct/treatmentoflegalfeesincurredbyindividuals.html


"The Internal Revenue Code (IRC), which is the body of tax laws written by the United States (U.S.) Congress and approved by the president in office at the time the law is created, tells us that except as otherwise expressly provided, such as itemized deductions, no deduction shall be allowed for personal, living, or family expenses. The IRC also says that, in the case of an individual, deductions are allowed for all of the ordinary and necessary expenses paid or incurred during the taxable year: 

  • For the production or collection of taxable income; 
     
  • For the management, conservation, or maintenance of property held for the production of income;

Managing, Conserving, or Maintaining Income-Producing Property – Legal fees related to managing, conserving, or maintaining income-producing property are generally deductible."

Source:  http://www.capstrategies.com/41232/Are-Legal-Expenses-Tax-Deductible/

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Highlighted
Level 15

Can a cash settlement of a retirement beneficiary lawsuit be used as a deduction?

Yes, these fees can be a deductible Sch A itemized deduction.  The reason is these are for the protection of income. 

Go to Deductions and Credits 

to "Other Deductions and Credits" 

to Legal Fees"

Below is the detail on why this is deductible and with links to the entire articles. 


"However, legal fees incurred by individuals may also fall into less favorable categories: personal, nondeductible expenses or miscellaneous itemized deductions limited by the 2%-of-adjusted-gross-income (AGI) limit for regular tax and not allowed for alternative minimum tax (AMT) purposes."

Source:  https://www.thetaxadviser.com/issues/2007/oct/treatmentoflegalfeesincurredbyindividuals.html


"The Internal Revenue Code (IRC), which is the body of tax laws written by the United States (U.S.) Congress and approved by the president in office at the time the law is created, tells us that except as otherwise expressly provided, such as itemized deductions, no deduction shall be allowed for personal, living, or family expenses. The IRC also says that, in the case of an individual, deductions are allowed for all of the ordinary and necessary expenses paid or incurred during the taxable year: 

  • For the production or collection of taxable income; 
     
  • For the management, conservation, or maintenance of property held for the production of income;

Managing, Conserving, or Maintaining Income-Producing Property – Legal fees related to managing, conserving, or maintaining income-producing property are generally deductible."

Source:  http://www.capstrategies.com/41232/Are-Legal-Expenses-Tax-Deductible/

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