I received a 1099-misc from a lawsuit settlement, the lawyer indicated that we can deduct the legal fees as an "above the line deduction" where would this be entered?

[Carl]

The lawyer may be wrong, and it's not uncommon for the lawyer to be wrong either. Most lawyers are not that well versed in tax law, unless they are a tax attorney. The deductibility of legal fees depends on what the settlement payment was for.
The bottom line is, since the IRS has a copy of that 1099-MISC, you have to report it exactly as printed. If legal fees are deductible, that's dealt with elsewhere in the program. So what was the settlement for? Knowing that, I can help you determine if your legal fees are "in fact" deductible or not.
Also, I need to know what boxes have dollar amounts in them, so I can assist you in entering the data correctly into the program. Otherwise, you'll do like most do and end up reporting it as self-employment income which generates a SCH C and results in additional self-employment tax on that income. You don't want that, since you did not receive that money for providing products or services while in business for yourself.

[vinnyt]

Thank You for the quick response, the lawyer did provide us a Statement of Account and it does indicate that attorneys do not give tax advice or purport to be tax experts  but the attorney fees  and costs should be deductible as an "above the line" deduction  and to confirm with a tax advisor.
 Answer to your questions:
  The settlement was for action for discrimination and harassment under the California Fair Employment and Housing Act

The only box that has a dollar amount on the 1099-MISC is number 3 "other income "

    Thank You again for your help
  

[Carl]

From what I see in IRC Section 62(a)(20) and (21) it appears to me you qualify to deduct those expenses. Now the IRC itself is a bunch of legal geek speak to me that is a bit difficult to understand and follow all the references. But there's a website at <a rel="nofollow" target="_blank" href="https://rroyselaw.com/tax-law/article/no-deduction-for-attorneys-fees-under-the-tax-cuts-and-jobs-ac...> that seems to put it into plain English us ordinary folks can understand.  More below.

[Carl]

It's important that you enter the 1099-MISC correctly so that it's not treated like self-employment income by the program. If you've already attempted to enter it and the program even "hinted" at it being self-employment income, then you need to delete it along with the SCH C the program created first, before attempting to enter it correctly.

Under the personal income tab scroll down to Business Items and under that elect to start/update Business Income & Expenses (SCH C). If you see "anything" listed there with a delete button to the right of it, then you need to click that delete button to delete the SCH C. Once you've done that, here's how to enter your 1099-MISC so it's not treated like self-employment income by the program. It's important you enter the 1099-MISC *exactly* as printed. The legal fees are dealt with elsewhere.

Reporting 1099-MISC (box 3) that is not self-employment income

Under the Wages & Income tab (or Personal Income tab) scroll down to Other Common Income and elect to start/update Income from form 1099-MISC. Then click YES to indicate you have a 1099-MISC.

Enter the 1099-MISC exactly as printed, and then Continue.

Enter the reason you got this money – be it scholarship, bonus, streaking butt naked across the 50 yard line of the super bowl, whatever. Then continue.

Select None of these apply, then Continue.

Select No, it didn’t involve work….. and Continue.

Select ONLY the tax year for which this specific 1099-MISC was issued. Do not select the year that you received the 1099. Select the year for which the 1099-MISC was issued. Select no other year. Then Continue.

Select No, it didn’t involve an intent to earn money, then Continue.

Select NO, then Continue.

Click the DONE button, and that does it.

For the legal fees, you deal with that under the Deductions and Credits tab. Scroll down to Other Deductions & Credits and under that elect to start/update Legal Fees. When/if asked for details about the legal fees, make sure you reference " IRC Section 62(a)(20) and (21)" so that if your return is pulled for review, whoever reviews it will better understand and "hopefully" not delay any refund you may have coming.

[Malinda]

Carl, 

I was reading your response and it was very thorough.  I myself am in a similar situation being told from my lawyers I would not be taxed on their portion, in my case they recieved 33%. My settlement resulted in w2 form, and 2/3 in 1099misc that included lawyers cut plus my portion for emotional distress among a few other th iij NHS listed.I was shocked to see that include my lawyers fees, as I was advised otherwise but later spoke to a tax consultant that in was traditional. I'm wondering how can I write off lawyer fees. I tried inputting misc deduction lawyer fees but it states it will not change my fee or state return. Is this a new law or bc I'm claiming standard deduction. Please help

[Carl]

. My settlement resulted in w2 form,

If that W-2 is for a prior tax year (2018 or before) then you will have to amend the tax return for that tax year. But I expect that since you were paid those back-wages in 2019, it would be a 2019 W-2. It's all 100% reportable as I'm sure you're aware, and there is no deduction from that income for legal fees at all.

and 2/3 in 1099misc that included lawyers cut plus my portion for emotional distress among a few other th iij NHS

I assume that last phrase was supposed to read "a few other things". With the TCJA (Tax Cuts & Job Act) of 2018 the laws on this have changed quite dramatically, and my above responses from more than 2 years ago just don't apply for the 2018-2019 tax year.  Bottom line is, your legal fees are not deductible on your personal tax return.

But you might want to review the IRS pubs listed below so see if they provide anything useful for your specific sitaution. I myself have not reviewed the below list for 2019 changes, and don't even know if they've been updated since the TCJA was enacted in 2018. So pay attention to the publication date or "updated on" date for each.

1. http://www.irs.gov/publications/p529/ar02.html
2. http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Deducting-Business-Expenses
3. https://www.irs.gov/pub/irs-pdf/p535.pdf
4. https://www.irs.gov/pub/irs-pdf/p551.pdf
5. http://www.irs.gov/publications/p529/ar02.html
6. http://www.irs.gov/publications/p502/ar02.html#en_US_2014_publink1000178968
7. http://www.irs.gov/pub/irs-pdf/p529.pdf
8. http://taxation.lawyers.com/tax-audits/are-attorneys-fees-tax-deductible.html
9. https://www.irs.gov/newsroom/certain-payments-related-to-sexual-harassment-and-sexual-abuse

[LarrieN]

I have a similar situation with a 1099-Misc issued.  The lawyers fees, are deductible per the IRS rules as stated, but I am not able to get to Schedule 1, Part II, Line 24h.  Do I need to upgrade to Home and Business or am I missing a step someplace.  Thanks.

[JohnB5677]

I did not evaluate the deductibility of the attorney fees, However, you can make a negative adjustment on Schedule 1.

Go to:

• Wages & Income
• Less Common Income
• Select Miscellaneous Income, 1099-A, 1099-C
• Select Other Reportable Income
• Any Other Taxable Income? Select, yes. 
• On the Other Taxable Income page
  • Description: type in “Deductible Attorney Fees”

Amount: enter in the adjustment amount as a negative number

@LarrieN 

[dewskidt]

I have a situation in which I received a 1099-misc for an Amazon pricing settlement.  The attorney sent me the 1099-misc with the total amount of the settlement in box 3.  The proceeds that were actually paid to me was about 45% of the settlement amount.  Can I claim the funds that were paid to the attorneys as a deduction off of the total amount in box 3 so that I do not have to pay taxes on the funds that I never received? 

Thank you in advance. 

[Vanessa A]

No.  Current tax law only allows a personal deduction for attorneys fees when they are incurred to do or keep your job.  Since the Amazon pricing suit does not meet that criteria, you will need to pay taxes on the full amount. 

[dewskidt]

Thank you! 

[kashou]

All legal fees related to employment or discrimination settlements qualify for tax deduction as "qualifying legal fees" also known as "Above the line deductions" per IRC Section 62. To deduct qualifying legal fees:
Go to Forms > Schedule 1, line 8, Z > Line z2b: enter gross amount from 1099-misc box 3 > Line z12: enter your legal fees as negative number. For example, enter: "-$18,000". Add description "qualifying legal fees (IRC Section 62)".
Here is the list of categories of plaintiffs that qualify for legal fees deduction: https://www.woodllp.com/Publications/Articles/pdf/12_Ways.pdf


If you did not deduct your qualified legal expenses, you may be able to amend the prior tax return and obtain a refund. 

Carl, you wrote "and there is no deduction from that income for legal fees at all." This is wrong. The employee was paid their settlement as W2 wages or back pay, and this is evidence that the settlement was employment related. Therefore the legal fees are eligible for tax deduction as "qualified legal fees". 

How many people followed your advice and did not deduct their qualified legal fees? How many people have you discouraged from deducting their legal fees? This is very concerning that Turbotax gave you the "Verified Expert" status.

[friendinlamadd]

Thank you all for the incredible feedback on this difficult subject. 

One more question: Am I doing something incorrectly or is it just that the legal fees are an itemized item?  I entered the information as stated above but the solution keeps saying that my standard deduction for Married Filing Jointly (head of household) is greater.  I am stuck with a 1099-MISC showing $10,000 for an Equal Opportunity case settlement yet my legal fees are pretty much the same amount.  :(

[SharonD007]

Please clarify your question.  Is your question regarding where your legal fees should be reported or where the settlement that you received on a 1099-MISC should be reported?  Thanks.

@friendinlamadd