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Legal settlement for wrongful termination

Hi! I was wrongfully terminated and brought suit against my former employer. We settled before going to court. The full amount was $65,000, but out of that (first) came legal fees and then taxes. I did not get anything but a statement (no tax form) from the former employer. Can I deduct the legal fees? And do I put only the amount of net income (after legal fees and taxes)? I don't know how or where to record this information. Thanks!
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Intuit Alumni

Legal settlement for wrongful termination

Legal settlements are reported as "Other Common Income."

You may or may not receive a 1099-MISC reporting the income. Regardless, this is how you should enter it in TurboTax:

  1. Click on Federal Taxes > Wages & Income  [In TT Self-Employed:  Personal > Personal Income].
  2. Scroll down to the Other Common Income section and click on the Start/Update box next to Income from Form 1099-MISC. [See Screenshot #1, below.]
  3. If you previously entered a 1099-MISC. in your return, you will be brought to the 1099-MISC Summary page.  Click on the Add Another 1099-MISC. box to add a new form [or Edit to change an existing form].  [Screenshot #2]
  4. If you haven't already entered a 1099-MISC, answer Yes to the question Did you get a 1099-MISC? (even if you didn't get one).
  5. On the Let's get the info from your 1099-MISC screen, complete the top part and then enter the award amount in Box 3 Other Income. [Screenshot #3]
  6. Fill out any other boxes from your paper 1099-MISC (if you have one), then click Continue.
  7. Enter a reason for the 1099-MISC. [Screenshot #4]
  8. On the screen, Does one of these uncommon situations apply? select This was money from a lawsuit settlement  and then answer the back wages question before clicking Continue[Screenshot #5]
  9. Below the grey line, click the Yes radio button answering Was any part of the lawsuit settlement for back wages?
  10. In the box that appears, enter the amount that was for back wages.

The amount of the settlement that was for back wages will be included in your wages and salaries income on line 7 of the 1040.  The total proceeds will appear on line 21 (other income) minus an adjustment for the amount included on line 7.

Legal fees to protect, generate or recover taxable income are deductible.  If the income is personal income, listed on lines 7 to 11, 15 to 16, 19 to 20, and some of the income on lines 13 and 14 of Form 1040, the expenses would be listed on Schedule A and subject to a limitation of 2 % of AGI.  If business income, the expense would be listed as legal and professional fee on the return you are filing.
To enter the legal fees in TurboTax, please follow these steps:

  1. Click on Federal Taxes [Personal in TurboTax Self-Employed] > Deductions & Credits.
  2.  In the Other Deductions and Credits section, click on the Start/Revisit box next to Legal Fees.
  3. On the Legal Fees screen, click the blue YES box.
  4. On the next screen, Report Deductible Legal Expenses, enter the amount of legal fees you paid.

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