Legal Fees to Recover Lost Wages

[taxriv]

Mary is let go as director of her company. Mary sues for age discrimination or something to recover lost wages. Mary wins and gets a settlement. Now since the settlement is taxable income because it's the recovery of lost pay, is the deduction for the legal fees that she had to recover that lost income subject to the 2% or not?

[ATSMAN]

There is a rule for above the line deduction for discrimination lawsuit legal fees. I am not in the office so can't look it up.

[New York Enrolled Agent]

Mary sues for age discrimination or something to recover lost wages.

You will need to do some research and review on the suit.

§62 - Adjusted Gross Income Defined permits a deduction ("netting") of legal fees an certain awards.

(20) Costs involving discrimination suits, etc.

Any deduction allowable under this chapter for attorney fees and court costs paid by, or on behalf of, the taxpayer in connection with any action involving a claim of unlawful discrimination (as defined in subsection (e)) or a claim of a violation of subchapter III of chapter 37 of title 31, United States Code or a claim made under section 1862(b)(3)(A) of the Social Security Act (42 U.S.C. 1395y(b)(3)(A)). The preceding sentence shall not apply to any deduction in excess of 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 lump sum or periodic payments) resulting from such claim.

[ATSMAN]

Thanks for providing the citation. That is exactly what they need to research.

I would recommend checking the actual judgement to see if it was indeed a discrimination lawsuit or just a regular dismissal involving other issues.

[Gene V]

Also, see TheTaxBook page 4-26

[taxea]

The attorney, if asked, will provide a detailed billing that indicates the portion of his bill that was for retention of income. This is the portion that is deductible.