Attorney fees for long term disability claim

[David19761976]

In 2024 my wife received a settlement from her insurance company for their denial of a long term disability claim.  The policy was employer sponsored.  Both her and her employer shared in paying the premiums.  Her portion was paid with pre-tax deductions from her payroll check.  We hired a long disability law firm to fight their denial of her claim.  The insurance company eventually paid a $75,000 settlement, which was paid directly to the law firm.  The law firm kept $30,000 for attorney fees and sent us a check for $45,000.  The insurance company sent my wife a W-2 for the full $75,000.  The law firm sent no tax documents to her.

We plan record the W-2 for the $75,000 of income.  My question is, can we deduct the $30,000 of legal fees on our joint tax return?  If yes, how do we record this in turbo tax.

[LeticiaF1]

Even if you are including that income as taxable income on your return.  Per IRS Publication 529, you generally can't deduct personal legal expenses.   For more information see the following links:

IRS Publication 529

Can I Deduct Legal Fees on My Taxes?

[David19761976]

Thank you.  But please confirm that IRC section 62 does not allow a taxpayer to deduct attorney fees involving disability income benefits as an above line deduction.  This would fall under ERISA.   This was a long term disability insurance claim denial.  I was told that I could make an above line deduction for the attorney fees on schedule 1 part 2 line 24h - Attorney fees.  Please confirms this is not correct.  Thank you.

[MonikaK1]

The only legal fees that may be deducted on Schedule 1, part 2, line 24h are attorney fees and court costs for actions involving certain unlawful discrimination claims. The instructions for that line state, "Enter attorney fees and court costs for actions involving certain unlawful discrimination claims, but only to the extent of gross income from such actions (see Pub. 525)". This is addressed under IRC Section 62(a)(20) and (21).

Publication 525 provides that 

"You may be able to deduct 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. You can claim this deduction as an adjustment to income on Schedule 1 (Form 1040), line 24h. The following rules apply.

The attorney fees and court costs may be paid by you or on your behalf in connection with the claim for unlawful discrimination, the claim against the U.S. Government, or the claim under section 1862(b)(3)(A) of the Social Security Act.

The deduction you're claiming can't be more than the amount of the judgment or settlement you're including in income for the tax year.

The judgment or settlement to which your attorney fees and court costs apply must occur after October 22, 2004."

You might ask your legal representative to explain how your matter falls under this category. 

Under current law, the only legal fees that are deductible for individuals are those related to employment discrimination cases where you are the plaintiff, whistleblower reward cases, and legal fees related to a business reported on Schedule C or Schedule E.

Please see this TurboTax tips article for more information regarding attorney fees.

Please see IRS Publication 529 for more information on miscellaneous deductions and the changes to the law.

[David19761976]

Thank you for your response to my question. 

My understanding is an "unlawful discrimination claim" covers many types of claims.  Including any employment related claim.  This would include an employment long term disability denial claim.  So contingent attorney fees paid for this type of claim would be an above the line deduction to your taxes.

Is my understanding correct?  Thank you.

[DianeW777]

It depends on the documentation you received outlining the settlement.  If you confirm this is an 'unlawful discrimination claim' you can take the legal fees as a deduction.  Keep in mind as stated by @MonikaK1 -- 'The deduction you're claiming can't be more than the amount of the judgment or settlement you're including in income for the tax year.'

@David19761976 

[David19761976]

Just wanted to add a comment to my question regarding deducting legal fees.  Their is an IRS memorandum released 8/30/2013 - release number:20133501F.  

It further defines "unlawful discrimination".   It states: 

Attorney’s fees that are included in the recipient’s income may be deductible from gross
income under certain circumstances. Section 62(a)(20) provides for an above-the-line
deduction from gross income for attorney’s fees and court costs, paid by, or on behalf
of, a taxpayer in connection with any action involving a claim of unlawful discrimination.
The term “unlawful discrimination” is defined in § 62(e) as an act that is unlawful under
any of a number of federal, state, or local laws including the ADEA, Title VII, and the
ADA. The deduction under § 62(a)(20) is limited to the amount that is includible in the
taxpayer’s gross income for the taxable year as a result of a settlement or judgment
resulting from the claim. I.R.C. § 62(a)(20). In addition to the statutes enumerated in
§ 62(e)(1) through (17), § 62(e)(18) also provides an above-the-line deduction for
attorney’s fees and costs incurred in an action or proceeding involving any aspect of the
employment relationship.

[David19761976]

Yes, I can confirm this was an "unlawful discrimination" settlement.   This is based on how the IRS is defining "unlawful discrimination".    Since the attorney's fees and costs incurred in the claim involved an employment relationship with a former employee, this would be defined by the IRS as "unlawful discrimination.  This would be an above-the-line deduction.   The deduction being claimed is less than the settlement amount I'm including in income for the tax year.

[MonikaK1]

Thank you for the additional information. If the settlement proceeds were reported on a Form W-2, and you have determined that the associated legal fees qualify as related to unlawful employment discrimination claims that may be deducted from gross income, enter the fees as shown below so that they appear on Line 24K of Schedule 1:

In TurboTax Desktop,

• Go to Income or Personal Income
• Select Choose what I work on
• Scroll down to Less Common Income, 
• Select Start next to Miscellaneous Income,
• Select  Other reportable income, Yes
• Description "Qualifying Legal Fees," and
• Enter the amount as a negative number.

In the alternative, you could enter the negative amount in Forms mode directly on Schedule 1, line 24h.

In TurboTax Online,

• Go to Wages & Income
• Scroll down to Less Common Income, 
• Select Miscellaneous Income,
• Select Other reportable income
• Description "Qualifying Legal Fees," and
• Enter the amount as a negative number.

@David19761976