Can I claim a deduction for personal expenses and losses that I incurred relating to wrongful termination employment lawsuit

[jewelcatz]

My husband and I incurred several different types of expenses and loss of income as a direct result of a wrongful termination lawsuit that took three years before the defendants finally agreed to a settlement.  Out of the total settlement amount, the defendants deducted and then paid all of my attorney's fees.  Then the defendants paid me the remainder in two separate payments, 10% of the remaining balance was paid to me to compensate me for lost back wages and the other 90% was paid to me for pain and suffering because they had severely and permanently injured my reputation by falsely claiming that I locked an employee in my office and held her captive against her will. (This was a bogus claim and accusation because in actuality, I was giving the employee a written warning for hiding customer checks (payments) in the drawers at her work station for months on end and never depositing these checks into the company's bank account).

However, during that three year time frame that my case was moving through the justice system, I had to pay travel expenses for attending court ordered conferences and appearances.  We (my husband and I) also had to withdraw money from my husband's retirement accounts in order to make ends meet every month as it was impossible for me to find other employment due to the false information that was entered into and made a permanent part of my personnel record.  Not only were we penalized for these withdrawals from my husband's retirement accounts but we also had to pay taxes on this money.  As a result of withdrawing money from these investment accounts, these investment accounts did not earn as much income as they should have.  I computed that we lost more than $20,000 in investment earnings on these accounts as a result of the legal shenanigans that the defendants and their attorneys perpetrated throughout the 3 year period.  The defendants and their attorneys cost me an extra $35,000 in attorneys because they appealed a decision by the Superior Court judge that was assigned to my case.  My case, then spent a whole year over in the Federal District Court of Appeals, which resulted in a decision of the Federal District Appeals Court to uphold the decision of the Superior Court Judge. In fact, it was considered a landmark decision by most of the professionals working in the Employment Law field across the country, not too mention the fact, that it was a unanimous by the panel of three distinguished Appeals Court Justices.  

So, I would like to know how I would report all of the personal financial losses and expenses that we incurred as a result of my wrongful termination lawsuit?  (Please note that nothing in my settlement agreement referenced that the money I was being paid was to compensate me or my husband for lost investment income and early withdrawal penalties that we had to pay, it was solely for the pain and suffering that I might experience in the future because it was discussed during the settlement conference that it would be very difficult for me to ever find suitable employment again after a 3 year period of no employment.)

[DianeW]

We are very sorry for the losses you sustained, but very excited that you won your case.  

Some of your settlement is not taxable, that's the good news.  The IRS tax law in these situations is based solely on whether you received taxable income as a result, and then you are allowed to deduct expenses only the extent of that taxable income. The taxable amount of your settlement creates the ability for you to deduct expenses that were attributable to obtaining the income that is taxed.  This includes your legal fees. However, it does not include the losses you sustained on investments that had to be used to allow you to financially survive while pursuing your argument with the courts.  

If there is any exception to the premature distribution of your retirement accounts that can be used, if not, there is no remedy for that additional tax. You can use this link to determine if any exceptions apply:

• There is an IRS chart here if you would like to review:  Retirement Topics-Exceptions to Tax on Early Distributions

You can report your taxable legal settlement by using the information below.  Also use the hyperlink to see what part of the lawsuit settlement is considered tax-free.

https://ttlc.intuit.com/replies/3302162

You can go directly to enter the legal fees using the steps here.

1. Open (continue) your return in TurboTax (online or desktop).
2. Select the Federal Taxes tab
3. Select Deductions and Credits
4. Scroll down to Other Deductions and Credits
5. Select Legal Fees (image attached)

 Since personal attorney fees are a miscellaneous itemized deduction, they are limited by the two percent rule: They are deductible only if, and to the extent, they (along with all your other miscellaneous deductions, if any) exceed 2% of your adjusted gross income (AGI).  If you are unable to use the itemized deductions because the standard deduction is a greater amount TurboTax will optimize and use the best outcome for you. (Standard deduction chart attached for your review)

[jewelcatz]

Just a note:  since the defendants paid my attorney directly, there was no part of the settlement amount that I received was not taxable.  Of the amount that I received, 90 % was identified as payment for pain and suffering and I had to pay income taxes on the entire amount of that portion of my settlement.  The remaining 10% balance of my portion of the settlement was identified as back wages and the defendants withheld employment taxes on that amount.  So, just to reiterate, there was no portion of the amount that the defendants paid me that was not taxable according to the IRS.