Disability Settlement Lawyer fees

A brother of mine worked for a major employer and was injured while work for them. Through his employer he had long term disability insurance (LTD). With the help of the LTD insurance company, he applied for and was granted disabled status by Social Security. The LTD insurance company had been writing him checks to make up the difference between his social security disability payment and 80% of his salary.

Soon after the received disabled status from SS the LTD company told him they had more stringent requirements for disability than the government and stopped sending the supplement check. He hired a contingency lawyer who negotiated a settlement of $25,000 in cash. The law firm took 60% of the settlement leaving him with just $10,000.

My understanding is since this wasn’t a personal injury case he must report the full $25,000 as income even though he received just $10,000. Being disabled every dollar is important to him so I wanted to check to be sure I got it right or if there is a way to save him a few dollars. He has no other sources of income besides Social Security Disability Payments

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1 Best answer

Expert Alumni

Jan 24, 2023 8:18:17 AM

First step would be to confirm the type of settlement he received. You can find this in his final settlement agreement. Below are the types of settlements and if they are taxable or nontaxable.

Physical injury or sickness settlements (dog bites, mesothelioma, etc.) are nontaxable and don't need to be reported unless you deducted medical expenses related to the injury on a previous tax return and you received a tax benefit from the deduction. In that case, report the medical expenses related to the incident as miscellaneous (other) income
Punitive damages (except certain wrongful death cases), and awards for employment discrimination and injury to reputation (libel, slander, or defamation) are taxable
Emotional distress and mental anguish settlements are taxable (unless they're related to physical injury or sickness), but only on the amount above and beyond the undeducted medical costs for treatment of the distress or anguish. You'll need to paper-file your return so you can attach a statement that shows the settlement amount minus the (undeducted) medical expenses related to treatment.

Any interest earned on a settlement is taxable and should be entered as though you received Form 1099-INT.

For some guidance on how to determine if the legal fees are deductible, go here for more information.

Once you confirm the amount that is taxable, you would follow the steps below to enter in TurboTax...

If you received a 1099-MISC:

Sign in to TurboTax and open or continue your return
Search for 1099-misc and select the Jump to link
If you're asked Did you get a 1099-MISC?, answer Yes
1. If you've already entered a 1099-MISC, select Add Another 1099-MISC
Enter the information from your 1099-MISC and select Continue
On the Describe the reason for this 1099-MISC screen,
enter lawsuit settlement and select Continue
On the Does one of these uncommon situations apply? screen, select This was money from a lawsuit settlement and then answer the back wages question before selecting Continue

If you didn’t receive a 1099-MISC, follow these steps to report the income:

Sign in to TurboTax and open or continue your return
Search for lawsuit settlement and select the Jump to link
Answer Yes to the question Any Other Taxable Income?
1. If you've already entered miscellaneous income, select Add Another Miscellaneous Income Item
Enter a brief description and the amount you received and select Continue