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    Employer is being sued by employees over vacation pay benefits. Both sides have agreed to settle. It is my understanding that the attorney fees portion of the settlement is deductible by the plaintiff employees as an above the line deduction.

    Based on this, I assume the employer would allocate the total award, including attorney fees, and report this on each employee's W-2 as compensation for services, but the employee would then deduct the attorney fee portion on his 1040 to get a refund of any income tax withheld by the employer on the attorney fee portion of the award.

    Am I correct in my assumptions?


    Attorney fees and court costs 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 on line 35, Form 1040, as an adjustment to income rather than as a miscellaneous itemized deduction. For all other types of court cases, you report gross income including the attorney fees, and deduct the expense as a miscellaneous itemized deduction, subject to the 2% AGI limitation, and also subject to AMT.

    A suit involving vacation pay would fall under the second reporting rules above.