Settlement Cost

[ILLMAS]

Hello, I have a question, a client of mine won a lawsuit of 18K, however he had a cost of 10K for attorney and 4K for court cost so he only recieved 4K. Do I report the net amount on line 21 of 1040 or report the gross amount on line 21 of 1040 and the attorney and court cost on line 22 of Sch A?

Thanks,

[ILLMAS]

Anyone??? Also, I forgot to mention that he didn't recieve 1099 from the settlement.

Thanks

[jainen]

>>Today, 08:30 AM<<

It's not unusual to wait more than an hour for a response.

Legal fees can encompass various matters, so without knowing more about the settlement it is not possible to give a definitive answer. The general answer is that Pub 529 includes "Legal fees related to producing or collecting taxable income" as a miscellaneous deduction to take on Schedule A. http://www.irs.gov/pub/irs-pdf/p529.pdf

[taxxcpa]

>>Today, 08:30 AM<<

It's not unusual to wait more than an hour for a response.

Legal fees can encompass various matters, so without knowing more about the settlement it is not possible to give a definitive answer. The general answer is that Pub 529 includes "Legal fees related to producing or collecting taxable income" as a miscellaneous deduction to take on Schedule A. http://www.irs.gov/pub/irs-pdf/p529.pdf

This can cost more than the net settlement since the deduction would be reduced by 2% of AGI but the gross amount would be considered income. It might not be enough to use itemized deductions instead of the standard deduction. The big winner is the lawyer who gets his fee regardless of whether it helps the client or not.

[zeke]

>>a client of mine won a lawsuit of 18K,<<

Must we not first determine that this is in fact taxable income????

Zeke

[jainen]

>>first determine that this is in fact taxable income<<

There is really no substitute for reviewing the actual settlement papers. Clients often misunderstand the terminology or other aspects of the legal proceedings. Sometimes what they originally sue for is NOT what they agree to in settlement. And sometimes the costs are mixed up between taxable and non-taxable issues.

[ILLMAS]

>>a client of mine won a lawsuit of 18K,<<

Must we not first determine that this is in fact taxable income????

Zeke

Ok here are the facts, it is kind of a tricky case, that is why I am asking for advice on how to account for this transaction. Ok my client got involved in helping a coworker with a harassment complaint, once the manager found out, he/she was giving him a difficult time and gave him a very bad annual performance review, he was working for the company for over 7 years and until the new manager came in + plus his involvement on the harassment complaint, things got bad for him. Well he challenged his performances review and hired an attorney to remove his awful performance review from his personnel records. The process started back in 2005 and in 2007 they finally settled. In one way it relates to his job, although there were no criminal charges against him nor was he fighting to keep his job. He eventually left that job, but still kept the lawsuit until it was finally settled in 2007.

Your thoughts on reporting the settlement & expenses.

[kcjenkins]

From the IRS website:

Deduction for Discrimination Suit Costs — A new deduction is available for those who pay attorney's fees and court costs in

connection with discrimination suits. Taxpayers can take the new deduction whether they itemize or not. The deduction cannot exceed the amount includible in income for the year on account of a judgment or settlement resulting from the discrimination claim. Generally, personal legal expenses are not deductible, but an employee who incurs legal expenses related to doing or keeping his job could deduct these expenses on Schedule A as a miscellaneous

itemized deduction. However, under The American Jobs Creation Act of 2004, an individual with legal fees and court costs arising from a discrimination suit may deduct the costs directly from income on the front of the tax return; this is known as an above-the-line deduction.

Under this new deduction, amounts paid for attorney's fees and court costs are deductible in computing alternative minimum tax, and are not subject to the 2 percent floor on miscellaneous itemized deductions or the overall limitation on itemized deductions. The Act, signed into law on Oct. 22, 2004, describes the discrimination claims qualifying for this new deduction. Only costs paid after Oct. 22, 2004, for judgments or settlements occurring after that date qualify for this deduction.

The amount that may be deducted above-the-line may not exceed the amount includible in the taxpayer's gross income for the taxable year on account of a judgment or settlement (whether by suit or agreement and whether as a lump sum or periodic payments) resulting from the claim. Code Section 62(a)(20).

For purposes of the deduction, unlawful discrimination is an act that is unlawful under:

(5) Section 4 or 15 of the Age Discrimination in Employment Act of 1967

[ILLMAS]

From the IRS website:

Deduction for Discrimination Suit Costs — A new deduction is available for those who pay attorney's fees and court costs in

connection with discrimination suits. Taxpayers can take the new deduction whether they itemize or not. The deduction cannot exceed the amount includible in income for the year on account of a judgment or settlement resulting from the discrimination claim. Generally, personal legal expenses are not deductible, but an employee who incurs legal expenses related to doing or keeping his job could deduct these expenses on Schedule A as a miscellaneous

itemized deduction. However, under The American Jobs Creation Act of 2004, an individual with legal fees and court costs arising from a discrimination suit may deduct the costs directly from income on the front of the tax return; this is known as an above-the-line deduction.

Under this new deduction, amounts paid for attorney's fees and court costs are deductible in computing alternative minimum tax, and are not subject to the 2 percent floor on miscellaneous itemized deductions or the overall limitation on itemized deductions. The Act, signed into law on Oct. 22, 2004, describes the discrimination claims qualifying for this new deduction. Only costs paid after Oct. 22, 2004, for judgments or settlements occurring after that date qualify for this deduction.

The amount that may be deducted above-the-line may not exceed the amount includible in the taxpayer's gross income for the taxable year on account of a judgment or settlement (whether by suit or agreement and whether as a lump sum or periodic payments) resulting from the claim. Code Section 62(a)(20).

For purposes of the deduction, unlawful discrimination is an act that is unlawful under:

(5) Section 4 or 15 of the Age Discrimination in Employment Act of 1967

Thanks, this helps out a lot.

[jainen]

>>discrimination claims qualifying for this new deduction<<

What sort of "harassment" was it? Your client was not the direct victim of discrimination except in the sense of work environment. His evaluation apparently related to his involvement in a co-worker's issue. This is what I meant when I said that the original claim may not be what he agreed to in the end.