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On a personal return (1040) legal fees are generally not deductible. The two exceptions are for legal fees incurred to determine or collect any tax liability, and legal fees expended to secure taxable income.
Therefore, legal fees can be deducted to the extent Social Security income is taxable. For instance, if 50% of Social Security income is taxable, then 50% of legal fees are deductible.
To deduct legal expenses, you must have enough itemized deductions (ie. Medical, mortgage interest, property taxes, charitable giving, ect) to exceed your Standard Deduction. If you itemize, your deduction is limited to the extent that it exceeds 2% of your Adjusted Gross Income.
So, you may not gain a tax benefit fro this deduction.
To report legal fees in TurboTax:
Click My Account (Top right of your screen).
Select Tools.
In the pop up window, select Topic Search.
In the search bar, type in legal expenses, deduction
Highlight it and select GO, and follow the prompts
I would love to know if there was ever a final answer to this question!? The only thing I can think of is that the government feels the $6000 is really given to the person receiving the disability award (income to them), and then they have to turn around and pass the $6000 over to their attorney (income to the attorney). All the government is doing is kind-a "by-passing" the person who received the disability award by streamlining the payment process and directing the funds directly to the attorney. Another possible reason of course would stop the person who received the disability award from keeping the $6000 attorney fee... frankly, that's probably what this is all about. I'll bet some attorney's group somewhere has argued with the Social Security Admin that this is the best way to do things to assure they get their $$$s.
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