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Can settlement payment to lawyer be deducted?

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peted
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Can settlement payment to lawyer be deducted?  Reply with quote  

So My wife was awarded some money from a wrongful termination complaint and we paid approx 30% to our attorney. I have heard that this money can be deducted on our return. This occured in 2005 so if we are able to do this...what is the process...and supplemental return? Thanks

Pete
Post Thu May 22, 2008 8:38 pm
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coaster
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I think so, but I'm not a CPA or tax attorney. I found this on the IRS website:
quote:
You can usually deduct legal expenses that you incur in attempting to produce or collect taxable income

I presume the settlement was for some combination of back pay and damages. I'm quite sure the back pay would qualify. Whether or not the damages qualify as taxable income depends on a long list of qualifiers that made my eyes glaze over. You can search the IRS website at www.irs.gov -- the search function actually works quite well. But to get a definitive answer, you'll probably have to get expert advice.

You'll need to file an ammended return for the tax year you got the award.

~Tim~
Post Thu May 22, 2008 10:19 pm
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BlankenshipFP
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Well, I'm not a botanist either, but Coaster has it right... if the award was taxable income, the fees paid to the attorney are likely deductible. File a 1040X for the year in question...

Jim Blankenship, CFP, EA
Blankenship Financial Planning, Ltd.
www.BlankenshipFinancial.com
Standard IRS Circular 230 Notice Applies
Post Fri May 23, 2008 2:31 pm
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peted
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Deducting lawyer fees from wrongful term settlement  Reply with quote  

Spoke with my tax guy on this and stated the following. I'd like a 2nd opinion if possibe. Thanks

"My intial conclusion was based on the June 21, 2007 attorney letter whereby it stated that the total amount paid to you was $130,725, and I had assumed the attorney fees of $59,275 was paid out of the $130k.
Therefore, under IRC Sec 62(e) (unlawful discrimination suit) any legal costs are allowed as an above the line deduction. However, upon review of the settlement papers, part 3 - Payment by Employers - it states that the award was for $190,000 and legal fees were paid from the 190k with the balance of $130,725 paid to your wife. The 2005 tax return discloses the discrimination award of $85,725, since this amount is primarily net of legal fees, we are not required to file an amended 2005 tax return."

Pete
Post Tue Aug 12, 2008 9:24 pm
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coaster
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Well, wait a minute, if the award was $190k, and $190k is what was reported on the tax return, then the legal fees are a deductible expense. So it all hinges on what was claimed on the tax return: the gross of $190k or the net of approx $130k.

It's amazing what size chunk attorneys get, isn't it. Confused

Reviewing your numbers, if $85,000 was claimed on the tax return, then you OWE taxes due on the balance.

It all depends on who gave which numbers to who, doesn't it?

~Tim~
Post Tue Aug 12, 2008 9:38 pm
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peted
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We reported the 130K not the 190K (i.e. we received a 1099 in the amount of 130K) so I guess we can't claim his fees in this case Sad

Of the 130K we claimed (successfully) that approx 50K was exempt from taxes due to personal injury (other factors in play here) hence our claim of only 85K...

Pete
Post Wed Aug 13, 2008 3:31 pm
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coaster
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All those numbers get confusing and the tax code is no help, is it? Best wishes and good luck to you and use the settlement wisely. Smile

~Tim~
Post Wed Aug 13, 2008 4:50 pm
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BlankenshipFP
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quote:
Originally posted by peted
We reported the 130K not the 190K (i.e. we received a 1099 in the amount of 130K) so I guess we can't claim his fees in this case Sad

Of the 130K we claimed (successfully) that approx 50K was exempt from taxes due to personal injury (other factors in play here) hence our claim of only 85K...

Pete


Well, pete, you did claim (deduct) his fees. Otherwise you would have claimed the entire judgement of 190k, in which case you would deduct the attorney's fees and the personal injury component, coming up with the taxable amount of ~85k. It can't be done both ways - taking the net (130k) and then deducting the fees again.

Jim Blankenship, CFP, EA
Blankenship Financial Planning, Ltd.
www.BlankenshipFinancial.com
Standard IRS Circular 230 Notice Applies
Post Thu Aug 14, 2008 12:47 pm
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coaster
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I think he was saying that another $50k from the net was tax-exempt. I don't have time to look it up now, but I seem to vaguely recall that some kinds of settlements aren't taxable income. Or is my memory playing tricks again..... Laughing

~Tim~
Post Thu Aug 14, 2008 2:30 pm
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BlankenshipFP
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Right - the portion of the settlement that applies to personal injury (not lost wages) would be untaxed... therefore, the claimed income of ~$85k would be correct.

Unless I'm missing something in this equation.

Jim Blankenship, CFP, EA
Blankenship Financial Planning, Ltd.
www.BlankenshipFinancial.com
Standard IRS Circular 230 Notice Applies
Post Fri Aug 15, 2008 3:00 pm
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