Are attorneys fees for wrongful termination against the U.S. federal government tax deductible and is it only deducted when back pay is received or only on the year when legal fees were incurred?

[Wibbletaru]

I'm preparing taxes for a family member. He lost his job in 2020 and has filed suit against a federal agency (his employer) for wrongful termination, discrimination, FMLA, and whistleblowing. He incurred significant attorney fees and legal expenses (let's say for illustrative purposes it is $75,000) in preparation for the suit. 

My understanding is that the current 2020 tax law allows for legal expenses related to discrimination, wrongful termination, and suits against the U.S. government of the amount of 2% above his AGI. 

My questions are the following:

1.) How do I enter this in TurboTax (Premier), when I entered in legal expenses, it simply says that legal expenses are not deductible for his federal return but Publication 529 seems to suggest it does. 

2.) Does the deduction happen in 2020 or does it happen if/when he receives back pay or a settlement in the future? In another words, can he take the deduction at the time he receives money or only when expenses are incurred. 

3.) The concern here is that he does not have enough income in 2020 (since he was wrongfully terminated) to make use of the significant attorney fees. Can a carryforward NOL be generated? TurboTax does not seem to do this. 

[macuser_22 · Accepted solution]

If this is an employment discrimination then legal fees are a "above the line" deduction that TurboTax does not support in the interview.

This deduction cannot be claimed using the online version.

It can only be entered in the forms mode in the CD/download desktop version directly on the 1040/ 1040SR Worksheet for Schedule 1 line 22.

in the smart worksheet line H enter the code UDC and the amount.

That will put it on the 1040 form line 10 as a deduction to income.

Per the IRS 1040 instructions page 97.

[quote]
Line 22
Include in the total on line 22 any of the following write-in adjustments. To find out if you can take the deduction, see the form or publication indicated. On the dotted line next to line 22, enter the amount of your deduction and identify it as indicated.

•Attorney fees and court costs for actions involving certain unlawful discrimination claims, but only to the ex-tent of gross income from such actions (see Pub. 525). Identify as “UDC.”
[end quote]

\https://www.irs.gov/pub/irs-pdf/i1040gi.pdf

[Wibbletaru]

Many thanks, this is super helpful.