How to report out of court settlement on 1040?
February 28th, 2010 | Author:
1. I recieved an out of court settlement for lost wages of $25000. My lawyer kept $5000 and the corporation said they would report $25000 to IRS with my Social Security # that I gave them. How much should I report in my tax form, 25K or 20K, since the corp will report giving me 25K but my attorney kept 5K and I only got 20K. IRS doesnt know my attorney kept 5K.
2. Also, where should I show this on the 1040 form?
3. If I itemize on Sch A then the amount of attorney fee is only $5000, but my deduction is $10700 which I then cannot take. Should I fill Sch A? If I do that, I will lose money.
4. Also, can I just put the attorney fee on line 36 of 1040 as UDC, since this was a discrimination case but never went to court. Does IRS need proof of a discrimination case?
The discrimination lawsuit was never filed in court, lawsuit was just prepared and the employer settled it before going to court or us ever filing. What proof do I have that it was a discrimination lawsuit if IRS should ask?
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You report the $25000 from the W-2 on line 7. You do not subtract the legal fees.
You report the $5K of attorney fees on line 36 and thank your lucky stars that it was unlawful discrimination and after 10/22/2004. Keep your proof that the lawsuit was filed under the appropriate statute.
Discrimination claim. Section 62(a)(20) covers many claims. Section 62(e) defines “discrimination,” but goes beyond traditional discrimination. It applies to any civil rights claim as well as to a broad spectrum of employment-related claims, including any employment-related legal claim under federal, state, common or local law. This includes cases of age, gender or racial discrimination. Section 62(e)(18)(ii) says it includes any actions “regulating any aspect of the employment relationship, including claims for wages, compensation, or benefits… any other form of retaliation or reprisal against an employee for asserting rights or taking other actions permitted by law.” On its face the statute seems to cover almost any employee vs. employer litigation. And in 2005 the Supreme Court interpreted it as covering the wrongful termination claim in Banaitis.
If a claim is covered under section 62(a)(20), the litigation proceeds, minus the legal fees and costs—but not less than zero—are includible in the taxpayer’s AGI. The statute does not distinguish between contingent or hourly legal fees, so all legal fees can be deducted if the claim is covered under this section.