Can I deduct legal fees for a settled lawsuit for wrongful termination based on age discrimination, ADA, and FLMA violations?

[Tax-Payer]

I settled a lawsuit for wrongful termination based on age discrimination, ADA violations, and FLMA violations. 

Net Settlement= $74,458 

Attorney Costs and Fees= $29,783

My check was for $44,675. I received a W2 for from the past employer.

Are all of the Attorney fees deductible?

Where do I enter this information on Turbo Tax?

[CarolynM · Accepted solution]

Unfortunately, no.

Legal fees for employment lawsuits of this nature were deductible on federal taxes before the changes to the tax laws. Unfortunately, most legals fees and all job related expenses for W2 earners were eliminated by the new tax laws.

However, some states have not followed the federal changes.

To see if you are eligible for a state tax deduction, enter your legal expenses into the program. 

Here is how:

Deductions & Credits

Other Deductions & Credits

Scroll to legal fees

If you state allows the deduction, the program will automatically include it in your state tax return.

For more information, follow this link: Misc Deductions 2018  

[TaxguyWannabe]

From the turbo tax software....

Do I qualify for the legal fees deduction?

Eligibility requirements

Eligible expenses include:

- Court costs and attorney fees related to either doing or keeping your job, including back pay, injury to reputation, and unlawful discrimination claims

More information about the legal fees deduction

For more information, see:

- IRS Publication 529, Miscellaneous Deductions
- IRS Publication 17, Chapter 28, Miscellaneous Deductions

Items are posted for discussion purposes and not meant to be tax advice.  

[DawnC]

The tax laws regarding deducting legal fees changed for 2018 and beyond.    Included in the bill was the suspension (repeal) of several federal deductions for tax years 2018–2025, which we've summarized here.

Keep in mind: While some states are following the IRS's lead by suspending the same deductions, other states have decided to keep certain tax breaks mentioned below. When you go through your state return, we'll make sure to include any tax deductions that are still valid in your state.

With recent changes to the tax laws and adjustments to what counts as being deductible or not, you might be wondering if you're able to deduct any of your legal fees. Follow our guide to determine which legal fees can and cannot be deducted on your taxes.  @TaxguyWannabe

[macuser_22]

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@TaxguyWannabe wrote:

From the turbo tax software....

Do I qualify for the legal fees deduction?

Eligibility requirements

Eligible expenses include:

- Court costs and attorney fees related to either doing or keeping your job, including back pay, injury to reputation, and unlawful discrimination claims

More information about the legal fees deduction

For more information, see:

- IRS Publication 529, Miscellaneous Deductions
- IRS Publication 17, Chapter 28, Miscellaneous Deductions

Items are posted for discussion purposes and not meant to be tax advice.  

---

If this is an employment discrimination then legal fees are a "above the line" deduction that TurboTax does not support in the interview.

This deduction cannot be claimed using the online version.

It can only be entered in the forms mode in the CD/download desktop version directly on the 1040/ 1040SW Worksheet for Schedule 1 line 22.

in the smart worksheet line H enter the code UDC and the amount.

That will put it on the 1040 form line 10 as a deduction to income.

Per the IRS 1040 instructions page 97.

[quote]
Line 22
Include in the total on line 22 any of the following write-in adjustments. To find out if you can take the deduction, see the form or publication indicated. On the dotted line next to line 22, enter the amount of your deduction and identify it as indicated.

•Attorney fees and court costs for actions involving certain unlawful discrimination claims, but only to the ex-tent of gross income from such actions (see Pub. 525). Identify as “UDC.”
[end quote]



\https://www.irs.gov/pub/irs-pdf/i1040gi.pdf

[banditthetaxdog]

The answer to this is YES.  See IRS Publication 529 (version December 2020) on page 9.  This deduction is "above the line".  TurboTax does not ask you the questions to get this deduction (WHY???).  Regardless you have to tell TurboTax to put you in itemized deductions; most times they put you in the standard deduction so you have to override it.  Then go to "forms" and find tax form Schedule 1, 1040.  On line 22, type in UDC and then the amount you paid for legal fees.  I am very disappointed that Turbo Tax didn't help with this...but after an hour or so of googling and following links I found this.  @CarolynM @TaxguyWannabe @macuser_22 

[macuser_22]

There are many seldom used calculations that are not supported by TurboTax.

For a list see:

https://digitalasset.intuit.com/DOCUMENT/A6QrdFCgW/010421-2020-unsupported-calcs-L1FQfTTgn.pdf

WHY???  $$$$   It costs money to support all of these in the step-by-step mode which would raise the price of TurboTax for everyone when 98% of users do not need it.

[SusanY1]

Please read carefully and be sure that you are using 2020 documents when doing any research. 

The 2020 Publication 529, page 9 indicates that this is a Schedule A deduction, NOT, an above-the-line deduction.

However, if the suit is against the federal government or a claim under section 1862(b)(3)(A) of the Social Security Act, then it is an above the line deduction - this exception is found in Pub 525, page 32.

Page 94 of the 2020 instructions for Form 1040 is the worksheet for an IRA Deduction, and has nothing to do with this topic. 

The general above-the-line deduction for these fees is for lawsuits that were before 2018.  In 2020, the deduction is part of itemized deductions on Schedule A, per the instructions in the 2020 Publication 529, on page 9 (other than for the exceptions described above).

The attorney that assisted you with the case should know if yours falls into the social security act category.  

@banditthetaxdog

[macuser_22]

---

@SusanY1 wrote:

Page 94 of the 2020 instructions for Form 1040 is the worksheet for an IRA Deduction, and has nothing to do with this topic. 

---

Typo  It is page 97 (corrected).

Attorney fees and court costs for actions involving certain unlawful dis-crimination claims, but only to the ex-tent of gross income from such actions (see Pub. 525). Identify as “UDC.”

[macuser_22]

---

@SusanY1 wrote:

However, if the suit is against the federal government or a claim under section 1862(b)(3)(A) of the Social Security Act, then it is an above the line deduction - this exception is found in Pub 525, page 32.

---

Section 1862(b)(3)(A) is only one of many.   §62(e)  (Unlawful discrimination defined)  lists 18 other sections that apply (including age discrimination in employment).

[SusanY1]

@macuser_22 Thank you for helping me to find the reference in the instructions.  

This refers to those claims against the federal government and those covered under the social security act (as described in Publication 525), but not to all claims of unlawful discrimination.  

It is unfortunate to have to consult three different documents to find all of the information for one data point - the IRS doesn't always make these things simple.  

The instructions above outline perfectly how to enter the deduction for this type of claim when they should flow to Line 10.

For other claims, the expenses should be included in itemized deductions under "other deductible expenses", "less common expenses", for taxpayers not using the standard deduction.

[James Walle]

Don't thinks this advice is accurate. See Pub. 529 (rev. Dec. 2020), pp 10 & 11 which separately state on each page that attorney fees for wrongful termination ARE deductible by being listed on Schedule 1.  This top of the line deduction does not need to be put on Schedule A so you may still take the Standard Deduction.   Am I reading this correctly? Will the Turbo Tax 2020 program use the Schedule 1 Deduction????

[macuser_22]

---

@James Walle wrote:

Don't thinks this advice is accurate. See Pub. 529 (rev. Dec. 2020), pp 10 & 11 which separately state on each page that attorney fees for wrongful termination ARE deductible by being listed on Schedule 1.  This top of the line deduction does not need to be put on Schedule A so you may still take the Standard Deduction.   Am I reading this correctly? Will the Turbo Tax 2020 program use the Schedule 1 Deduction????

---

I see nothing in Pub 529 that uses the words "wrongful termination " at all.   It talks about unlawful discrimination that was discussed earlier in this thread.     That can be reported in Schedule 1, but the TurboTax interview does not support that.

If this is an employment discrimination then legal fees are a "above the line" deduction that TurboTax does not support in the interview.

This deduction cannot be claimed using the online version.

It can only be entered in the forms mode in the CD/download desktop version directly on the 1040/ 1040SR Worksheet for Schedule 1 line 22.

in the smart worksheet line H enter the code UDC and the amount.

That will put it on the 1040 form line 10 as a deduction to income.

Per the IRS 1040 instructions page 97.

[quote]
Line 22
Include in the total on line 22 any of the following write-in adjustments. To find out if you can take the deduction, see the form or publication indicated. On the dotted line next to line 22, enter the amount of your deduction and identify it as indicated.

•Attorney fees and court costs for actions involving certain unlawful discrimination claims, but only to the ex-tent of gross income from such actions (see Pub. 525). Identify as “UDC.”
[end quote]

\https://www.irs.gov/pub/irs-pdf/i1040gi.pdf

 

[macuser_22]

The employees answer above is incorrect.   It is not just the social security act.   There is a comma and a *or* in the sentence in pub 525 that the employee referred to.   Other types of illegal discrimination come before the *or* and are listed in section 62(e).

"Deduction for costs involved in unlawful discrimination suits.You may be able to de-duct attorney fees and court costs paid to recover a judgment or settlement for a claim of unlawful discrimination under various provisions of federal, state, and local law listed in section 62(e), a claim against the U.S. Government, or a claim under section 1862(b)(3)(A) of the Social Security Act."

[whatsgoingon]

After spending hours today with TurboTax experts - this is the first comprehensive reply. It is allowable for unlawful discrimination cases which this question is about as it violated rights as a protected class, however - turbo tax online just does not support it. 

It would have saved me so much time if I had known this versus having employees telling me unlawful discrimination cases and legal fees are no longer deductible which is not the case.