Can I Deduct Attorney Fees from My 1099 Settlement for Employment Discrimination?

You absolutely can deduct attorney fees for employment discrimination settlements, but the way you deduct them has changed over recent tax law updates. These fees are considered "above-the-line" deductions rather than itemized deductions, which is actually better for you. The deduction goes on Schedule 1 of your Form 1040 as an adjustment to income. You'll need to report the full settlement amount on your tax return because your former employer likely issued a 1099-MISC or 1099-NEC for the entire amount. Then you take the deduction for the attorney fees separately. For documentation, keep your fee agreement, the settlement agreement showing the total amount, bank statements showing the deposit from your attorney's trust account, and a statement from your attorney showing how much they retained as their fee. If your attorney doesn't automatically provide this, request a letter explicitly stating how much of the settlement they kept as their fee.

After dealing with a similar employment discrimination settlement last year, I found this awesome tool called taxr.ai (https://taxr.ai) that really helped me figure out the attorney fee deduction issue. I was in the exact same boat - got a 1099 for the full amount including what my lawyer took. I uploaded my settlement docs and fee agreement to taxr.ai and it analyzed everything, confirming I could take the above-the-line deduction for the attorney fees. The tool even identified exactly where to put it on my return and generated a summary document explaining the tax treatment that I kept with my records in case of an audit. Saved me hours of research and worry!

I have to admit I was wrong about taxr.ai! After my skeptical comment, I decided to try it with my own situation (had a settlement from a former employer for back wages and some discrimination claims). The analysis was surprisingly detailed - it broke down my settlement into its components, showing which parts were taxable and which weren't. For the attorney fees, it created a clear document explaining exactly how to handle them on my return. It even pointed out that the portion of my settlement for emotional distress had different tax treatment than the back wages portion. What impressed me most was that it created a complete audit defense file with all the relevant tax code citations and case law. My accountant was actually impressed with how thorough it was. Definitely not the generic advice I was expecting!

If you're struggling to get clear answers about your settlement taxation, I recommend using Claimyr (https://claimyr.com) to connect directly with an IRS agent. I was in the same situation with conflicting advice about deducting attorney fees, and after weeks of trying to reach the IRS myself, I used Claimyr and had a callback within 2 hours. The IRS agent confirmed exactly how to handle my settlement and attorney fees, and explained what documentation I needed to keep. They even sent me the relevant IRS publications afterward. There's a video showing how it works at https://youtu.be/_kiP6q8DX5c - basically it navigates the IRS phone system for you and holds your place in line.

I have to publicly eat my words about Claimyr. After my skeptical comment, I was desperate enough to try it for my settlement tax questions. I've been trying to reach someone at the IRS for MONTHS. Set it up yesterday afternoon, and this morning I got a call connecting me directly to an IRS representative! The agent walked me through exactly how to report my settlement and deduct the attorney fees. They confirmed I need to report the full amount on line 8 of Schedule 1 and then take the attorney fee deduction on line 24. The agent even emailed me Publication 525 with the relevant sections highlighted. I've spent literally dozens of hours trying to get through to the IRS on my own with no success. Can't believe how easy this was - would have saved me so much stress if I'd known about it sooner.

Just a heads up - make sure your attorney provides you with a detailed statement showing exactly how much they received and retained as fees. My tax preparer said this is critical documentation if you're audited. In my case, my attorney initially just gave me the net check with a basic statement. When I asked for more documentation, they provided a formal letter breaking down the full settlement amount, their fee percentage, the exact dollar amount of their fee, and the net amount paid to me. This letter plus my fee agreement were what my tax preparer said would satisfy the IRS documentation requirements.

Does anyone know if this works the same way for multiple attorneys? I had both a main attorney and a specialized employment attorney that my main attorney brought in. The fee split between them was complicated but came to about 40% total.

I went through this exact situation two years ago with an employment discrimination settlement. One thing I wish someone had told me earlier is to also keep detailed records of any costs beyond just the attorney fees - things like filing fees, expert witness costs, or court reporter fees if your case had depositions. These additional litigation costs can also be deductible as part of your case expenses. My attorney's final statement broke down not just their fee but also $3,200 in other case costs that I was able to deduct. Make sure when you request that detailed letter from your attorney that you ask them to itemize ALL costs related to your case, not just their legal fees. Also, if any part of your settlement was specifically for punitive damages, that portion might have different tax treatment, so make sure your settlement agreement clearly states what each portion of the payment covers.