Lawsuit - W2, 1099-MISC and attorneys fees

[butternut43]

A lawsuit settlement resulted in backpay and liquidated damages. The W2 for backpay issued included tax deductions, while the 1099-MISC included the awarded total amount and the total sent to the attorney in box 10 which is I assume is showing the total of the W2 back wages and the liquidated damages. Attorneys fee's were 25% of the entirety of both the W2 and 1099-MISC. When entering in this information, the total amount increased the 1099-MISC above what was received.

Example to keep it simple:

W2 Backpay - $3000 in box 1 along with associated taxes taken out

1099-MISC - $3000 in box 3 for liquidated damages and $6000 in box 10 (attorneys fees) without any taxes taken out. 

One check was issued from the attorney for the entirety of the settlement. Attorneys fees were 25% ($1500)

When entering this in, it now shows I made $9000 on the main 1099-MISC screen. 

Do I enter that this was part of lawsuit? When I do it asks if any of it was for backpay. This doesn't seem right as I had a W2 for backpay. But the box 10 attorneys fees seems to throw things off.

Also, how are attorneys fees handled. Are they a deduction from my AGI or part of an itemized deduction. How can this be entered if AGI reduction. I tried multiple ways and it usually ends up requiring me to create a business. 

Thank you

[MonikaK1]

Information returns for lawsuit settlements that include both back wages and other damages typically consist of both a Form W-2 for the back wages, often showing taxes withheld, and a Form 1099 for the rest of the distribution. 

If all of the settlement is on a Form 1099-MISC, but some of it was for back wages, enter the full amount in the Form 1099-MISC section. When you get to the screen that asks, "Does one of these uncommon situations apply?", and you check the "lawsuit settlement" box, a box pops up asking if any of the settlement represented back wages. Enter the amount of back wages in the box.

Legal fees related to personal issues typically can't be deducted under current law. See this tax tips article for more information. 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. Whistleblower and discrimination legal fees are deductible on Form 1040 as adjustments to income up to the amount of taxable income received. See IRS Publication 529 for more information.

Whether and how much of the amount of a legal settlement is taxable depends on the type of settlement proceeds you received and what they represented. Check the terms of the legal settlement. If you received punitive damages, this would be taxable income. 

Property settlements that compensate for a loss in value of your property that are less than the adjusted basis of your property are not taxable and generally do not need to be reported on your tax return. However, you must reduce your basis in the property by the amount of the settlement. If the property settlement exceeds your adjusted basis in the property, the excess is income. 

See this help article for instructions for entering a legal settlement in TurboTax. If only part of the settlement is taxable as explained above, enter the entire amount of the 1099 and then make a separate entry of a negative amount and name it "nontaxable portion of settlement".

See IRS Publication 4345 for more information about legal settlements.

See this IRS article for more information about the tax treatment of lawsuit settlements.