Should I take a deduction for damages?
March 21, 2014
Legal fees either entirely deductible or non-deductible
March 21, 2014
Show all

Tax treatment for attorney fees from suing government

The attorney fees and costs incurred in connection with claims of “unlawful discrimination” and certain claims against the federal government are entitled to an above-the-line deduction. Before the American Jobs Creation Act of 2004, only as a miscellaneous itemized deduction was allowed for these fees. The result of this was that there was less than full or even no tax benefit for those fees that did not exceed 2% of the taxpayers AGI in the aggregate. Under the current law, however, the amount that may be deducted above-the-line, but the deduction may not, of course, exceed the amount includible in the taxpayer’s gross income for the taxable year on account of a judgment or settlement.

The newly enacted Section 62 defines “unlawful discrimination” to include a number of specific statutes, including any federal whistle-blower statute, any federal, state, or local law “providing for the enforcement of civil rights” or “regulating any aspect of the employment relationship . . . or prohibiting the discharge of an employee, discrimination against an employee, or any other form of retaliation or reprisal against an employee for asserting rights or taking other actions permitted by law.”