Attorney Fees

[rsandy]

My client has entered into mediation with a former employer who didn't pay her
$ 35,000.00 in a quarterly incentive bonus. She is likely to settle for $ 30,000.00. She has incurred $ 10,000.00 in attorney fees which she has paid out of pocket. She wants to know if she can allocate her settlement in such a way that the attorney fees are deductable. As I've researched how that might be treated on her Sch A, under Miscellaneous Deductions, it's still unclear to me if she can really take the deduction.
What say you?

[taxmom34]

my understanding is that an attorney's fees are deductible on schedule A if incurred while getting taxable income

[OtisMozzetti]

Sch A miscellaneous deduction subject to 2% AGI

My client has entered into mediation with a former employer who didn't pay her
$ 35,000.00 in a quarterly incentive bonus. She is likely to settle for $ 30,000.00. She has incurred $ 10,000.00 in attorney fees which she has paid out of pocket. She wants to know if she can allocate her settlement in such a way that the attorney fees are deductable. As I've researched how that might be treated on her Sch A, under Miscellaneous Deductions, it's still unclear to me if she can really take the deduction.
What say you?

This is clearly an expense of producing taxable income, deductible on Sch A as a miscellaneous deduction, which is unfortunately subject to 2% of AGI reduction.

One issue that might come up is whether the $10,000 attorney fees were paid primarily to get the quarterly incentive bonus paid up or were also paid for other reasons.

[erchess]

What if

the company paid her $20K, paid the attorney $10K and the attorney refunded her $10K? Would it not be correct for her to pay tax on $20K with no Sch A deduction for attorney's fees and would not she come out ahead while the attorney and the company were no worse off?

[Davc]

the company paid her $20K, paid the attorney $10K and the attorney refunded her $10K? Would it not be correct for her to pay tax on $20K with no Sch A deduction for attorney's fees

No.

and would not she come out ahead while the attorney and the company were no worse off?

Temporarily. And in the end the IRS would get more money by assessing preparer penalties.