Discussion:Legal Fee deduction for discrimination settlement

IRC 62(a)

(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.

Schedule A provides "Examples of Expenses You Cannot Deduct" "Legal expenses for personal matters that do not produce taxable income."

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The deduction you are claiming cannot be more than the amount of the judgment or settlement you are including in income for the tax year.

My impression is that no income ... no deduction. If I am wrong, I would like to know the reference since I gave someone advice that legal fees for a discrimination case where no settlement was paid were not deductable.

UNLAWFUL DISCRIMINATION CLAIMS LEGAL FEES. You may be able to deduct 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 as an adjustment to income on Form 1040, line 35, rather than as a miscellaneous itemized deduction. See LEGAL EXPENSES under OTHER EXPENSES, later.

LEGAL EXPENSES 
 

You can usually deduct legal expenses that you incur in attempting to produce or collect taxable income or that you pay in connection with the determination, collection, or refund of any tax.

  You can also deduct legal expenses that are: 
 
    1. Related to either doing or keeping your job, such as those you 
    paid to defend yourself against criminal charges arising out of your 
    trade or business, 
 
    2. For tax advice related to a divorce if the bill specifies how much 
    is for tax advice and it is determined in a reasonable way, or 
 
    3. To collect taxable alimony. 
 
  You can deduct expenses of resolving tax issues relating to profit or 

loss from business (Schedule C or C-EZ), rentals or royalties (Schedule E), or farm income and expenses (Schedule F) on the appropriate schedule. You deduct expenses of resolving nonbusiness tax issues on Schedule A (Form 1040). See TAX PREPARATION FEES, earlier.