Can I deduct attorney out of pocket expenses that were incremental to 40% contingency fees for wrongful termination/gender discrimination

[yabras299]

Total Settlement was $100,000

Attorney out of pocket expenses:  $15,000

Net Settlement:  $85,000

Attorney Contingency Fees 40%:  $34,000

My share:  $51,000 for non-wage damages (check from former employer).  I also received a check for $1000 less taxes from them for unpaid wages.

Former employer issued check to attorney for $49,000 ($15K + $34K).

Can I take a deduction for either the attorney out of pocket expenses ($15K) or contingency fees ($34K)?

I assume I will get a 1099 from my attorney? And a W-2 and 1099 from former employer?

[Phillip1 · Accepted solution]

If the 1099-MISC or W-2 from the settlement is issued with more than the 51,000 dollars that you actually received, you can deduct any of the attorney fees included in your income.

Legal fees associated with “doing or keeping your job” are deductible as a miscellaneous itemized deduction on schedule A and the portion associated with unlawful discrimination is deductible as an adjustment. However, you can only take a deduction related to income reported on your return. If the payers of the settlement do you the favor of only including your share of the settlement on the 1099-MISC, you cannot deduct any thing.

See the explanation for deductible legal fees here:

Legal Expenses

You can usually deduct legal expenses that you incur in attempting to produce or collect taxable income or that you pay in connection with the determination, collection, or refund of any tax.

You can also deduct legal expenses that are:

• Related to either doing or keeping your job, such as those you paid to defend yourself against criminal charges arising out of your trade or business,

• For tax advice related to a divorce if the bill specifies how much is for tax advice and it is determined in a reasonable way, or

• To collect taxable alimony.

You can deduct expenses of resolving tax issues relating to profit or loss from business (Schedule C or C-EZ), rentals or royalties (Schedule E), or farm income and expenses (Schedule F) on the appropriate schedule. You deduct expenses of resolving nonbusiness tax issues on Schedule A (Form 1040 or Form 1040NR). See Tax Preparation Fees, earlier.

Unlawful discrimination claims.   You may be able to deduct, as an adjustment to income on Form 1040, line 36, or Form 1040NR, line 35, rather than as a miscellaneous itemized deduction, attorney fees and court costs for actions settled or decided after October 22, 2004, involving a claim of unlawful discrimination, a claim against the U.S. Government, or a claim made under section 1862(b)(3)(A) of the Social Security Act. However, the amount you can deduct on Form 1040, line 36, or Form 1040NR, line 35, is limited to the amount of the judgment or settlement you are including in income for the tax year. See Pub. 525 for more information.

[yabras299]

I just received by W-2 from my former employer for $1000.  I also received a 1099-MISC for $51,000 from my prior employer.  Based on this, it does not appear I can deduct the $15K (attorney out of pocket) or $34K (attorney contingency fees), since my prior employer paid them directly out of the $100K settlement.  Is that correct?

[Phillip1]

Yes. The employer has taken care of the deduction before tax. This is better result than if you had to deduct on your return.

[laurenkuykendall]

I am in a similar situation, except I was involved in a settlement of being underpaid for overtime wages. My former employer issued me a 1099-MISC with Other Income as $20,000. I already received a 1099 and W-2 from the attorneys for the settlement I received. So is this $20,000 fully deductible?

[null20]

This doesn't say how to enter attorney fees on form 1040, line 36. How do I enter this into Turbo Tax?

[scotmac123]

There is apparently no provision within the TurboTax software to deduct, as an adjustment to income on Form 1040, line 36, rather than as a miscellaneous itemized deduction, attorney fees and court costs associated with unlawful discrimination claims. Any attempt to make a dedicated line item 36 change utilizing the "forms" feature results in errors and an inability to file electronically. 

However, there is a workaround to enter the data and successfully e-file.  Enter the attorney fees using Section H of the "Other Adjustments To Income Smart Worksheet" in the forms selection and the software will subsequently complete the Line 36 entry. Identify the Section H entry as, "UDC" and/or "Expenses 1099 Miscellaneous".