Welcome back! Ask questions, get answers, and join our large community of tax professionals.
cancel
Showing results for 
Search instead for 
Did you mean: 

wrongful termination settlement

Level 2

I have a client that will be getting a wrongful termination settlement of 60K.    From what we can tell it will all be taxable as lost wages.    There will be legal fees of about 20K.  The Miscellaneous  deduction section of the schedule A has been eliminated.  Is there anyway she can take these legal fees to help reduce the income she will be taxed on?     We are not sure the tax form that will be generated, but I am guessing it will be a W-2.   

I am trying to find the best way for the client to claim the settlement so the least amount of taxes are paid.

Thanks

Jacquie

Labels (1)
0 Cheers
3 Replies 3
Level 15

If the character of the award is compensatory in nature, the gross amount should be reportable and taxable as wages on a W-2.

Assuming your client will need to pay the $20k in attorney and court fees out of pocket and this is a suit for unlawful discrimination as defined under §62(e) (or certain other types of infringement), your client may be entitled to an above-the-line deduction under §62(a)(20).

---------------------------------------------------------------------------------
Still an AllStar
Level 2

Thank you !-  The client is not sure what form she will be receiving, but agreed it most likely be a W-2.  They are taking the legal fees from the settlement.   So, if it is a W-2, she will get a W-2 do 60K, but only a check for 40K.    If the client's settlement qualifies for the unlawful discrimination definition, would they still be able to take the above the line deduction?   

0 Cheers
Level 15

NP. If the entire award is for, for example, backpay, $60k would be reported on the W-2 and she'd take a $20k above-the-line deduction on her F.1040.

---------------------------------------------------------------------------------
Still an AllStar