Lawsuit Settlement

[Raznkane]

I had to pay out a lawsuit settlement in 2023. Is this money somehow deductible in some way?

[Bsch4477]

Not unless it was connected to your business. 

[DaveF1006]

It depends on the lawsuits. personal legal fees are not deductible on your federal return but may be deducted in your state return. To report the legal fees, go to:

1. Federal
2. Deductions and Credits
3. Other Deductions and Credits
4. Legal Fees

Fees reported here are not reported on your federal return but may be deductible in your state return. You would still report this in your federal return to flow to your state return if your state allows legal expenses to be reported.

If the lawsuit is related to your business, including rental properties, then legal fees may be deductions. For instance, according to the IRS, you can deduct:

• Fees that are ordinary and necessary expenses directly related to operating your business (should be entered on Form 1040, Schedule C).
• Fees for resolving tax issues, advice or preparation of tax forms related to your business (should be included on Form 1040, Schedule C).
• Fees for rentals or royalties on properties for which you earn income (should be included on Form 1040, Schedule E)
• Fees related to farm income and expenses (should be included on Form 1040, Schedule F).
• Fees related to whistleblower claims (should be included on Form 1040).
• Fees related to unlawful discrimination claims (should be included on Form 1040).

Also, if you decide to report personal legal fees in order to itemize on your state return, the following legal fees are not allowed to be deducted.

• Fees related to nonbusiness tax issues or tax advice.
• Fees that you pay in connection with the determination, collection or refund of any taxes.
• Personal legal expenses, including:
  • Child custody
  • Purchasing real estate
  • Breach of promise to marry
  • Civil or criminal charges related to personal relationships
  • Personal injury
  • Title preparation
  • Estate planning such as will preparation
  • Property claims or settlements
  • Divorce
• Fees for defending civil or criminal charges that arise from your participation in a political campaign.

Can I Deduct Legal Fees on My Taxes

[Opus 17]

In general, personal legal fees are not deductible on your federal tax return for 2018-2025, as a result of the 2017 tax reform law.  Personal legal fees may be deductible in some states, if you itemize your deductions on your state tax return and if your state follows the 2017 rules.  (Note that the list given by the expert, and the blog post that the list was copied from, do not quite match the rules for New York State, which I am most familiar with, and may disagree with other states.    If you have any questions, check the rules for your specific state.)

If you pay legal fees in connection with your business, those legal fees are usually deductible.  However, settlement costs and legal fees associated with certain kinds of wrongdoing are not deductible.  See publication 535.

https://www.irs.gov/pub/irs-prior/p535--2022.pdf