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New Member

Can I deduct legal fees paid to secure a lump sum Social Security payout? Its considered taxable income.

I spent $6000 in Legal Fees to Secure Social Security Disability. I received a Lump sum an SSA-1099. Since I am being taxed on the Lump Sum as income, Can I deduct the Legal fees since the law reads as follows?  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.

9 Replies
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New Member

Can I deduct legal fees paid to secure a lump sum Social Security payout? Its considered taxable income.

How much you can deduct for your attorneys fees depends on how much of your lump sum SSDI benefits end up being taxable once you enter everything into your tax return. Use the same percentage for the attorney's fees. You will first have to enter your SSA-1099 along with all other income.  Next, preview your return to determine how much, if any, of the SSDI, was taxable.  This appears on line 20b of Form 1040, or 14b of Form 1040A.  

If any amount appears on the line B for Social Security, a portion of your SSDI benefits were taxable.  This means that a portion of your attorney's fees are likewise deductible, in the same percentage.  So if you found that $5,000 out of $10,000 in benefits turned out to be taxable, then ½ of the attorneys fee could also be entered into Schedule A as part of your itemized deductions. 

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New Member

Can I deduct legal fees paid to secure a lump sum Social Security payout? Its considered taxable income.

Where in Schedule A deductions do you input the "portion" of attorney's fees that are deductible.  Please be specific to line number and entry.  

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Expert Alumni

Can I deduct legal fees paid to secure a lump sum Social Security payout? Its considered taxable income.

To enter legal fees go to:

  1. Deductions and Credits
  2. Scroll all the way down to Other Deductions and Credits
  3. Select Legal Fees
  4. Enter the amount
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Level 15

Can I deduct legal fees paid to secure a lump sum Social Security payout? Its considered taxable income.

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New Member

Can I deduct legal fees paid to secure a lump sum Social Security payout? Its considered taxable income.

Yes, Line 16, takes you to a Worksheet (Schedule A, Lines 16).   Works sheet has lines 29 thru 38 for "Federal and State Use".    Still don't see a line number for "Legal Fees".

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Level 15

Can I deduct legal fees paid to secure a lump sum Social Security payout? Its considered taxable income.

According to the TurboTax interview, legal fees are no longer deductible (starting in 2018).  Even in the past, they were only a misc itemized deduction, subject to the 2% of AGI threshold.  All "2% deductions" were eliminated under the new tax law. 

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New Member

Can I deduct legal fees paid to secure a lump sum Social Security payout? Its considered taxable income.

In the "On Demand Tax Guidance" it says:

 

What is the legal fees deduction?
 

Legal fees aren't deductible on your federal return, but some states allow you to deduct them on your state return. We'll figure out if these expenses can affect your state return and do the calculations for you.

If you have legal fees that relate to your employment or business, those fees are deductible. You can also deduct legal expenses for things that produce taxable income, such as rental property and other investments, and legal fees in connection with an income tax dispute.

How do I qualify?

Eligible expenses include:

  • Fees for tax advice related to a divorce, if the bill specifies how much of the fee is for tax advice
  • Costs of collecting taxable alimony or arranging details of alimony payments
  • Court costs and attorney fees related to either doing or keeping your job, including back pay, injury to reputation, and unlawful discrimination claims
  • Fees for personal injury actions where you recover taxable damages
  • Estate tax planning fees related to tax planning or income-producing property
  • Costs of collecting taxable Social Security benefits
  • Fees to recover income-producing property such as stocks or bonds loaned as collateral
What can’t I deduct?
Inherited property
Collecting Social Security

You can deduct the percentage of legal fees related to your Social Security benefits that are taxable.

Example: Susan hired an attorney to help her claim Social Security benefits, 50% of which are taxable. As a result, Susan can claim 50% of the legal fees she paid the attorney.
 
BUT 
In the Tax Interview it says
 
While your legal fees didn't affect your federal return, you now have a record of your info for future reference, which is smart.
 
So which is it ???
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Level 1

Can I deduct legal fees paid to secure a lump sum Social Security payout? Its considered taxable income.

I'm trying to find the answer to the same question.  IRS Publication 529 (Rev 12/2019) states the following: 

Legal expenses that you incur in attempting to produce or collect taxable income or that you pay in connection with the determination, collection, or refund of any tax are miscellaneous itemized deductions and are no longer deductible.  

There is no mention of the "special circumstances" for Social Security Disability referenced in the TurboTax On Demand Help.  It looks to me like this section in TurboTax has not been properly updated to reflect the 2018 tax law changes.  It would help to know the source of their information, but I don't know how we can find that. 

 

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Expert Alumni

Can I deduct legal fees paid to secure a lump sum Social Security payout? Its considered taxable income.

Because of the tax law change in 2018, legal fees for any manner are not deductible. I am not aware of any special circumstances  that mentions the contrary.

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