How to file a settlement civil law suit with employer with regards to unpaid wages. Now I am about ready to settle the law suit and getting a small fraction of claim

[semnet]

I filed a law suit some 3 years ago for unpaid wages for vacation time. I was able to deduct some of the the legal fees in 2017. Now I am about ready to settle the law suit and getting a small fraction of the Legal Fees + Unpaid wages. The legal fees is many times the amount of the unpaid wages. Do I get a W2 or 1099 MISC form from the employer for the entire amount of the settlement (legal fees plus unpaid wages)? Then do I deduct the legal fees that I have not yet claimed? I am not sure how this all works.

[PhyllisG · Accepted solution]

Back pay wages are reported on the Form W-2 in the year that they are paid.

Settlement fees are generally reported on the Form 1099-MISC in box 3 or box 14.  Either way, the legal fees are considered taxable income to you, and should be reported on line 21 Other Income of the Form 1040 Schedule 1.

You will enter the Form W-2 in the income tax section of your return. To enter the legal fees do the following: 

1. Select the Personal Income or Wages and Income tab; 
2. Click the "I'll choose what I work on" button; 
3. Scroll to Other Common Income
4. Click Start next to Form 1099-MISC
5. Enter your Form 1099-MISC income exactly as shown on your form.  Your entries should mirror the form 1099-MISC.  DO NOT check the FATCA box.
6. Enter Legal Fees as the reason, then click Continue
7. Check None Apply from the uncommon situation list 
8. Continue navigating through the prompts
9. Select "No" to questions regarding work and earned money
10. If you do not have any other Form 1099s to report, select "No" then Continue

Prior to the Tax Cuts and Jobs Act, legal fees were deducted under the Job Expenses and Certain Miscellaneous Deductions section of the Form 1040 Schedule A.  These deductions were reduced by 2% of a taxpayer's gross income. Tax reform has eliminated the Miscellaneous section; therefore, legal fees are generally no longer deductible.

However, you can deduct your above the line legal fees in employment and qualifying whistleblower cases. The amount cannot exceed the income you received from the litigation in the same tax year.

To enter the legal fee in TurboTax do the following: 

1. Select the Deductions and Credits tab
2. Click I'll choose what I work on
3. Scroll down to Legal Fees, click Start then Continue
4. Enter the amount of the legal fees up to the award you received
5. Click Continue, then Done.

[Edited 04.10.19 | 12:28 PM]

[semnet]

It does not make sense that the money you pay for attorney fees are not deductible after I recover lost wages. I already paid tax on the money I used for attorney fees, had to spend it to recovery wages I was entitled to and on a recovery of $15,000 in wages, I had to spend $40,000 in attorney fees?

[PhyllisG]

I agree, but Congress makes the laws.

[PhyllisG]

GOOD NEWS after further research! You can deduct your above the line deductions for fees in employment and qualifying whistleblower cases but it cannot exceed the income you received from the litigation in the same tax year.

[PhyllisG]

Please refer to the edited version dated April 10, 2019.  I have included the steps to enter the legal fees into TurboTax.

[semnet]

thanks

[PhyllisG]

You are welcome.