My attorney represented me for a civil lawsuit. We settled the case in 2019 and I received a 1099-MISC from one defendant with a full amount of 8000 dollars presented in the 1099-MISC as a part of our settlement, it is not a bodily injury or emotional, thus I am quiet sure it's taxable according to my research so far. However, I only received 1000 dollars because according to my contract with my attorney, I will only get 20% from the final settlement and if any exceed 1000 USD, I will only receive 1000 dollars, thus, I only got 1000 dollar instead of 8000 dollars.
Given the fact that I actually received the 1099-MISC under my name for the full amount of 8000 dollars, I wonder how I can fill my tax return properly in order to not responsible for the other portion of 7000 dollars that was deducted by my attorney for legal fee? Thank you very much for your professional advise and help!
if the suit is not related to the plaintiff's trade or business, there may be no write-off for legal fees or costs. That means you are taxed on 100% of your recovery. Examples of settlements facing tax on 100% include recoveries:
From a website for invasion of privacy or defamation;
From a stock broker or financial adviser for bad investment advice, unless you can capitalize your legal fees;
From your ex-spouse for claims related to your divorce or children;
From a neighbor for trespassing, encroachment, etc;
From the police for wrongful arrest or imprisonment;
From anyone for intentional infliction of emotional distress;
thus the taxes on the $8000 could exceed the $1000 you netted. did the attorney explain this to you?
Thanks for the quick reply. No, we didn't discuss this before, however, my attorney send an explanation to me regarding to this issue, please see following;
"You may have received a 1099 from either the creditor or credit reporting agencies for a case
that a law firm settled for you. The amount in the 1099 may have been for the full amount of the
settlement, even though you received only a portion of the settlement. For example, a client
may receive a 1099 for the full $5,000 paid in settlement agreement, while the client only
received $1,000 from the settlement. This is because the tax document that came from the
creditor or credit reporting agencies includes the attorneys' fees paid to the attorney.
The good news is, IRS opinion letters state that you are not responsible for paying taxes on the
amount that was allotted for attorney fees. If the client has no contractual obligation (as per the
retainer signed with the attorney) to pay the firm out of pocked attorneys' fees, under any
circumstance, win or lose, and the law firm is just receiving attorney fees from defendants that
were sued (as per required by law) the portion of the 1099 that represents that amount for the
attorney fees, is not taxable to the client. Therefore, one would only be responsible to pay taxes
on the amount the client actually received. Please consult with your tax professional for the
proper method in reporting this income. Our firm EIN is xxxxx."