Am I required to pay taxes on an employer's reimbursement of a portion of my legal fees resulting from the employer refusing to supply counsel in the first place?

[indycoman]

I am state employee that was subjected to an external investigation directly resulting from work place actions.  State law requires employees in this situation to use private counsel and then apply for reimbursement if no wrong doing was found.  Having done this, I submitted all my proof of services and payments to the state and received a partial reimbursement.  In receiving the reimbursement, my understanding is that the state viewed this the same as a reimbursement for mileage, lodging, etc.

Am I required to pay taxes on this reimbursement even though I used my post-tax salary to pay it in the first place only because the state required me to?

[MichaelL1 · Accepted solution]

If you did not deduct the legal costs you incurred to protect your income (your job) then the reimbursement is NOT taxable income to you.

[indycoman]

Thanks so much!  Since it is still reported as 'other income' on a 1099-MISC, is some special documentation required to explain why it was not reported on the 1040?

[MichaelL1]

What I would do is report it as "Other Income" on line 21 of the 1040, and also put an entry in for line 21 for the same amount as a negative number.  This was you are accounting for it on the return and disclosing it to IRS.  The cases in this question I answered last week are your basis for this answer.  The reason yours are not income and then a deduction is due to the accountable arrangement with the employer.  
To get on line 21, go to Less Common Income, click on Miscellaneous Income, then click on bottom one again and type in the 1099Misc issuer and dollar amount and the same thing with a negative amount.