Legal fees for LT Disability Claim Denial

[David19761976]

Attorney fees for long term disability claim

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.

[MonikaK1]

Without knowing all of the particulars of the matter, it's not clear whether the legal fees you describe are deductible on Schedule 1 under either of the currently allowable circumstances: unlawful discrimination suits and whistleblower awards.

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 clarify 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.