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Breach of Contract Fee

I paid a total of $20,000 to my former employer as breach of contract fee. I wanted to break free from the employment contract due to personal reasons. It was stipulated in the contracted that I have to pay that amount if I will not finish the contract. Can I apply this amount as tax deduction? Thanks

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1 Best answer

Accepted Solutions
GiseleD
Expert Alumni

Breach of Contract Fee

Unfortunately not. 

 

For tax years 2018 through 2025, most legal fees and court costs cannot be deducted. These costs cannot be netted against the settlement. Here's what CAN be deducted:

 

1) You may be able to deduct, as an adjustment to income on your Schedule 1 (Form 1040 or 1040-SR) or Form 1040-NR, attorney fees and court costs for actions settled or decided after October 22, 2004, involving a claim of unlawful discrimination, a claim against the U.S. Government, or a claim made under section 1862(b)(3)(A) of the Social Security Act. However, the amount you can deduct on your Schedule 1 (Form 1040 or 1040-SR), or Form 1040-NR, is limited to the amount of the judgment or settlement you are including in income for the tax year. 

 

2) You can deduct legal expenses that are related to doing or keeping your job, such as those you paid to defend yourself against criminal charges arising out of your trade or business. You can also deduct expenses of resolving tax issues relating to profit or loss from business (Schedule C), rentals or royalties (Schedule E), or farm income and expenses (Schedule F) on the appropriate schedule.

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3 Replies
GiseleD
Expert Alumni

Breach of Contract Fee

Unfortunately not. 

 

For tax years 2018 through 2025, most legal fees and court costs cannot be deducted. These costs cannot be netted against the settlement. Here's what CAN be deducted:

 

1) You may be able to deduct, as an adjustment to income on your Schedule 1 (Form 1040 or 1040-SR) or Form 1040-NR, attorney fees and court costs for actions settled or decided after October 22, 2004, involving a claim of unlawful discrimination, a claim against the U.S. Government, or a claim made under section 1862(b)(3)(A) of the Social Security Act. However, the amount you can deduct on your Schedule 1 (Form 1040 or 1040-SR), or Form 1040-NR, is limited to the amount of the judgment or settlement you are including in income for the tax year. 

 

2) You can deduct legal expenses that are related to doing or keeping your job, such as those you paid to defend yourself against criminal charges arising out of your trade or business. You can also deduct expenses of resolving tax issues relating to profit or loss from business (Schedule C), rentals or royalties (Schedule E), or farm income and expenses (Schedule F) on the appropriate schedule.

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**Mark the post that answers your question by clicking on "Mark as Best Answer"

Breach of Contract Fee

MaryK4
Expert Alumni

Breach of Contract Fee

The article is referring to contractual damages that apply to a business or self-employed, but unfortunately if you were a W2 employee you cannot deduct because there are no more Miscellaneous Itemized Deductions.

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