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.
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.
To enter legal fees go to:
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.
In the "On Demand Tax Guidance" it says:
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.
Eligible expenses include:
You can deduct the percentage of legal fees related to your Social Security benefits that are taxable.
I'm trying to find the answer to the same question. IRS Publication 529 (Rev 12/2019) states the following:
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.
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.