Legal fee for taxable income SSDI

[campbear1]

I had to fight for Social Security Disability and hired an attorney. I won and received taxable income in 2020 above the AIG allowed for disability so its fully taxable. It will not allow me to write off the legal fee in TT for recovering taxable income in 2020..   It says My AIG is to high to allow the write off. Chicken and egg,   Help?

[gloriah5200]

Unfortunately legal fees to collect taxable income are not currently deductible unless it is paid for a discrimination lawsuit award or a business expense.

[campbear1]

Thank you , I'm disabled and normally no income. I won the SSDI this year with a lump sum back pay. They taxed the lump amount and have the legal fee payout in it on the SSDI tax form. The amount I'm being taxed on the lump sum was obtained by the attorney. Can I subtract the attorney fee from the lump sum? The tax on the lumps sum is a lot.  It was to collect taxable income.

[DaveF1006]

It depends. Legal fees are itemized deductible expenses.  if you are claiming a standard deduction this year, it means you don't have enough expenses to itemize. With this said, you can enter legal fees by doing the following.

1. After logging into Turbo Tax go to federal>deductions and credits>other deductions and credits>show more 
2. legal fees>start 

[campbear1]

I will say thanks, my last question.   They included the attorney fees as part of my income even though it was paid out directly to the attorney,  So I'm going to be paying income on $6000 that was paid to the attorney that I never received.    Lumppayout + Attorney fee = total taxable income.    Can this be right?    Not to say that the attorney will pay income tax on the same 6000, Taxed twice. 

[Cynthiad66]

The tax laws that passed for 2018 and beyond eliminated legal fees as a deduction for your federal return.

In December 2017, Congress passed the largest tax reform bill in over 30 years. Included in the bill was the suspension (repeal) of several federal deductions for tax years 2018–2025, which we've summarized below.

Miscellaneous deductions subject to the 2% limit, including unreimbursed job expenses (reported on Form 2106) have been repealed for tax years 2018–2025.

[K9JN]

For 2023 tax year, Pub 529 States " Legal expenses that you incur in attempting to produce or collect taxable  income ....... are miscellaneous deductions.....    I read this to mean that a portion of the SSDI legal fee can be claimed as a  misc deduction if a portion of the SSDI income is taxable.   e.g.  Assume 45% of the SSDI is taxable, then in this example, the dollar amount of 45% of the SSDI legal fee that exceeds 2% AGI can be claimed, assuming no other misc deductions to simplify this example .   Do I understand this correctly?

[Opus 17]

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@K9JN wrote:

For 2023 tax year, Pub 529 States " Legal expenses that you incur in attempting to produce or collect taxable  income ....... are miscellaneous deductions.....    I read this to mean that a portion of the SSDI legal fee can be claimed as a  misc deduction if a portion of the SSDI income is taxable.   e.g.  Assume 45% of the SSDI is taxable, then in this example, the dollar amount of 45% of the SSDI legal fee that exceeds 2% AGI can be claimed, assuming no other misc deductions to simplify this example .   Do I understand this correctly?

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I don't know where you are seeing that, the current version of pub 529 on the IRS web site is dated December 2020 and does not contain that language.

https://www.irs.gov/pub/irs-pdf/p529.pdf

The principle in general is correct for tax years prior to 2018.  Legal fees connected with producing income are deductible.  If 45% of your SS income is taxable, then 45% of your legal fees would be eligible to be included as 2% miscellaneous deductions.  But that entire class of deduction is not allowed for 2018-2025.

You can enter those expenses because they may be deductible in some states, but you have to take into account state rules for taxability of social security.  For example, in New York State, SS benefits are never taxable, so even though NY still allows the general class of 2% deductions, the specific legal expenses for winning your SS case are not deductible in NY.