Discussion:Legal Fees Paid for Ongoing Settlement Negotiations

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Revision as of 19:42, 8 April 2008

Discussion Forum Index --> Advanced Tax Questions --> Legal Fees Paid for Ongoing Settlement Negotiations
Discussion Forum Index --> Tax Questions --> Legal Fees Paid for Ongoing Settlement Negotiations

JCCPA (talk|edits) said:

8 April 2008
Client is dealing with a sexual harassment claim with a former employer. I understand the taxability matter of reporting income upon settlement. Further, in this situation, legal fees are deductible above-the-line, on Form 1040, Line 36 as "UDC."

My question is - We have $50k of legal fees paid in 2007...and the large settlement to be received by client will not be received until mid 2008. Would anyone recommend waiting for the deduction until the receipt of the settlement during 2008? That would provide the best matching of income and expense (although we know individuals are typically cash basis taxpayers) and is desired in this specific case. Any thoughts are much appreciated.

TexCPA (talk|edits) said:

8 April 2008
It is my understanding you can only deduction the legal fees to the extent of the settlement, look @ SEC. 703. CIVIL RIGHTS TAX RELIEF of the American Jobs Creation Act of 2004

JCCPA (talk|edits) said:

8 April 2008
Thanks, Tex.

Yes, I agree.

However, legal fees are going to much, much, much less than the settlement.

The issue is some legal fees have paid in 2007 and the settlement is going to be in 2008.

It's a timing/matching issue.

RoyDaleOne (talk|edits) said:

8 April 2008
"The claimant may take the deduction only to the extent that the claimant includes other portions of the award or settlement in income. In other words, the above-the-line deduction may not exceed the amount that the claimant included for the year."

I guess you wait until the claimant receives athe settlement. I guess this is because you may not deduct more than award.

JCCPA (talk|edits) said:

8 April 2008
Great RoyDale - THANKS.

That is what I had advised my client in this matter.

The advice is much, much appreciated.

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