The settlement income, assumed it is reported in box 3 as other income, will be other income on your tax return. The fees associated with obtaining the settlement will be an itemized deduction.
Yes, you can deduct legal fees that were paid to produce taxable income.
Most legal fees are not deductible. However, you can deduct legal fees connected with your attempt to produce taxable income. The amount of the fees is limited to the amount of income being taxed.
It would be a miscellaneous itemized deduction. Miscellaneous itemized deductions are only available if you qualify to itemize and only to the extent that they exceed 2% of your Adjusted Gross Income.
- In TurboTax Self Employed:
- Personal tab > Deductions & Credits > Other Deductions & Credits > Legal Fees
- Click the "Learn More" button to review more information
- Click on the screenshot to enlarge and review
Other examples of deductible attorneys fees include fees incurred in:
- Your attempt to produce taxable income
- Tax collection or refund
- Keeping your job (for example, defending yourself against charges arising from your business activities)
- Tax advice related to a divorce
- Collection of taxable alimony
- Personal tax issues (for example, estate planning fees)
- Legal expenses concerning your business or trade are deducted on the appropriate Schedule C, E, F, or Form 4835.
You cannot deduct legal fees related to:
- Nontaxable income
- Bankruptcy
- Home purchase
- Identity theft
- Spouse abandonment
- Adoptions
- Child support
