Parents Paid Legal Expense for Child

[dtlee]

The parents paid the legal expenses on behalf of their minor child to engage a lawyer for a discrimination suit against a retail establishment who apparently detained the child and accused the child of shoplifting solely on the basis of the child's ethnicity.

Suit was never filed and retailer agreed to settle out of court without admitting any wrongdoing.

Payments were made on a "retainer" basis to the lawyer in 2008 and settlement will be paid to the child in 2009. Settlement will be fully taxable.

Some questions:

Are the legal fees considered paid when the case is settled and the lawyer computes the fee or are they considered paid when handed over to the lawyer as part of the retainer?

Who claims the legal fees? Are these considered the parents expenses and can they deduct them even though the child is the beneficiary of the legal action?

If not, can the child deduct these even though the child never paid them?

What about "Kiddie Tax?" Are the legal fees deductions against unearned income only if the child can deduct them or, since the expenses are taxed at the parent's rate, can the fees be deducted against the unearned income regardless of whose tax return they are on?

Thanks for any insight. This is a new one for me.

[BOB W]

.................................................. ......

[JohnH]

Would the legal fees be considered a gift from the parents to the child?

[taxea]

The expense is not deductible because it is not for the retention of income. taxea

[erchess]

taxea

Unlawful discrimination claims legal fees. Attorney fees and
court costs paid after October 22, 2004 for actions involving a claim
of unlawful discrimination, a claim against the U.S. Government,
or a claim made under Section 1862(b)(3)(A) of the Social Security
Act, are deductible as an adjustment to income rather than as
a miscellaneous itemized deduction. The deduction is limited to
the amount included in gross income for that claim.
All other attorney fees and court costs for this type of claim are
deductible as a miscellaneous itemized deduction subject to the
2% AGI limitation. - From TTB

Does that or does it not contradict what you said?

[taxea]

Erchess...I stand corrected.. the child can take it on his/her return..but if the parent files the income for the child on their return, can they take it? thanks taxea

[dtlee]

Erchess...I stand corrected.. the child can take it on his/her return..but if the parent files the income for the child on their return, can they take it? thanks taxea

I think therein lies the problem.

I do not think the child can take the deduction because the child did not pay the expense.

However, the payment will be in the child's name. Since the child was a minor at the time of the incident and will be over 18 at the time of the settlement, the settlement will be paid directly to the child. Thus, since the parents will not be claiming the income, they cannot claim the expense anywhere.

I believe that this also creates a Kiddie Tax situation for the child but the income can still not be offset by the expenses directly related to the income because these are not considered the child's expenses.

These are the issues that I am trying to sort out if anyone can help.

[erchess]

The problem I have

here is that I don't know how the lawyer would answer if asked by the IRS who made the payment. Any of us would have known to gift money to the child and write a check on the child's checking account, but most non professionals would not think of that and most lawyers who are not tax lawyers wouldn't think to recommend it.

Assuming that the lawyer would answer that the parents made the payment then I think dtlee is correct - income belongs to the child, expenses benefit no one because not paid by the person with the income, and child has kiddie tax issues.