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Your legal fees may be deductible. There are situations where they are not however. As to reporting the payout, it depends on what the payout was for, and on what tax reporting document it's reported to you on.
Payment for unpaid wages are taxable income. Period. Payments for other things depends on what it's for, and there's to many "other things" to list here.
So I have a similar situation. I filed a law suit some 3 years ago for unpaid wages for vacation time. I was able to deduct some of the the legal fees in 2017. Now I am about ready to settle the law suit and getting some fraction of the Legal Fees + Unpaid wages. The legal fees is many times the amount of the unpaid wages. Do I get a W2 form from the employer for the entire amount of the settlement (legal fees plus unpaid wages)? Then do I deduct the legal fees that I have not yet claimed? I am not sure how this all works.
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