Client sued employer and received a W2 for disability benefits from a third-party provider for $15k. Client received a check for $8k from the attorney who kept $7k for legal fees. It looks like we can add the $7k in legal fees to Line 22 of the Sch A. The W2 is reported in full on page 1 of the 1040. Can anyone confirm this is the proper way to handle the income and also the itemized deduction for the legal expense? Thanks!
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Yep, you have it right.
There are a few situations where attorney fees may be netted against the gross judgment, and only the net reported as income, but I don't believe this is one of the exceptions. If you wish to check, see Code §62(a)(19).
Btw, attorney fees like your client paid, deductible on Schedule A, can not be deducted in computing AMT. This AMT add-back applies to all "miscellaneous itemized deductions." (Code §56(b)(1)(A)(i)).Roland Slugg
"I do what I can."
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