topic IRS Whistleblower award legal fee exclusion from income on California 540 in Deductions & credits

IRS Whistleblower award legal fee exclusion from income on California 540

JohnASmith — Sun, 16 Feb 2025 19:58:44 GMT

Everything calculated correctly on form 1040, but California 540 added the legal fees back as income on Form 540 as an adjustment. Is this right? Thanks in advance for help with this.

Re: IRS Whistleblower award legal fee deduction on California 540

MonikaK1 — Mon, 17 Feb 2025 17:16:01 GMT

California still does not follow Federal law on this issue. Because California still allows miscellaneous itemized deductions, the fees are still deducted on Schedule A for California and not as a deduction from gross income.

A bill, California SB 1377, was introduced in 2022 to change the treatment to conform with the Federal return, but the bill ultimately did not pass.

How were the fees entered on your Federal return? Did you make any adjustments on the California return?

Re: IRS Whistleblower award legal fee deduction on California 540

JohnASmith — Mon, 17 Feb 2025 19:56:36 GMT

Thank you very much for your well informed input. The legal fees are entered on 1040 Schedule1, line 24i. I made no adjustments on the California form 540. On form 540 TurboTax entered it as an itemized deduction, but it's limited to 2% of AGI. Not very helpful considering the legal fee was 30%. The out of state attorney claims that the entire legal fee should be entered as an adjustment. This could be a very expensive mistake if he is wrong. Is he wrong? Thanks again.

Re: IRS Whistleblower award legal fee deduction on California 540

MonikaK1 — Mon, 17 Feb 2025 20:21:21 GMT

California conforms to the definition of Adjusted Gross Income under IRC section 62, but does not conform to IRC section 62(a)(21) relating to awards to whistleblowers. As a result, California does not conform to the federal change that expands the deduction for attorney’s fee related to awards to whistleblowers. This is why TurboTax moved the deduction from gross income on your Federal return to miscellaneous itemized deductions.

Thanks for the update confirming where you made your entry in the Federal return and where TurboTax made the change for California.

This California FTB webpage contains a summary of all Federal law changes from 2018 and where California law deviates from Federal. This webpage has links to more information about California nonconformity.

Re: IRS Whistleblower award legal fee deduction on California 540

JohnASmith — Tue, 18 Feb 2025 00:06:22 GMT

Please confirm the bottom-line is that TurboTax entered it correctly on the form 540 as I described? I just want to make sure I didn't miss something in your explanation. Thank you again.

Re: IRS Whistleblower award legal fee deduction on California 540

MonikaK1 — Tue, 18 Feb 2025 20:25:32 GMT

Yes, if you entered the legal fees for a whistleblower case on 1040 Schedule1, line 24i on your Federal return, and TurboTax moved the fees to miscellaneous itemized deductions on your California return, Schedule A, that is the correct treatment under current law.