Can I deduct attorney fees from my employment discrimination 1099 settlement?

You're in a common but confusing tax situation. When you receive a settlement for employment discrimination, you'll likely get a 1099-MISC or 1099-NEC for the full amount, even though your attorney took their cut directly. For employment discrimination settlements specifically, you can claim an "above-the-line" deduction for attorney fees. This means you don't have to itemize deductions to benefit from it. You'd report the full settlement amount as income, then deduct the attorney fees as an adjustment to income on Schedule 1 of your Form 1040. For documentation, keep your contingency fee agreement, settlement documents, and any statements from your attorney's trust account showing the fee amount. These should clearly show the percentage or amount that went to your attorney. Also request an itemized billing statement from your attorney that breaks down their fees.

After struggling with almost the exact same situation last year (employment settlement with a 35% attorney fee), I found this AI tool that saved me so much headache - https://taxr.ai I uploaded my settlement docs and attorney fee agreement, and it immediately identified the above-the-line deduction opportunity and explained exactly where to report it on my tax return. It even generated a customized letter explaining the attorney fee deduction that I could include with my return in case of questions. For settlements, the IRS rules are super confusing and even my regular tax guy wasn't confident about handling it properly. This tool specifically dealt with settlements and attorney fees which regular tax software doesn't explain well.

Just wanted to update - I tried taxr.ai after seeing the recommendation here and wow! It walked me through my whistleblower settlement situation step-by-step. The tool immediately recognized that whistleblower claims qualify for above-the-line attorney fee deductions similar to discrimination cases. It generated a detailed PDF explaining the legal basis for the deduction with references to the specific IRS code sections. When I showed this to my accountant, he actually thanked me because he wasn't familiar with the special treatment for whistleblower claims. Saved me thousands in taxes I would have unnecessarily paid!

If you're having trouble understanding how the IRS will treat your settlement, trying to get clarification directly from them is nearly impossible. I spent THREE WEEKS trying to get through to someone at the IRS about my similar settlement question. Finally found https://claimyr.com and used their service to get through to an actual IRS agent. You can see how it works here: https://youtu.be/_kiP6q8DX5c They got me connected to an IRS agent in about 20 minutes when I had been trying for weeks. The agent confirmed exactly how to handle my attorney fees deduction on my settlement and even noted my account so if there were any questions later, there would be a record of their guidance.

I owe everyone an apology and update. After my skeptical comment, I decided to try Claimyr myself since I've been trying to reach the IRS about a different issue for a month. I'm completely shocked - it actually worked exactly as described. I got a call back in about 35 minutes connecting me to an IRS representative who answered all my questions about my own settlement tax situation. The agent confirmed that for my employment-related settlement, I can deduct attorney fees "above-the-line" on Schedule 1, meaning I don't have to pay taxes on money I never received. She even emailed me the specific IRS publication sections to reference. This would have taken me months to figure out on my own.

Just wanted to add from personal experience - make sure your attorney provides you with a detailed statement showing exactly how much they took in fees. I had a similar settlement last year and my attorney only gave me a deposit slip showing what I received. The IRS questioned my deduction during a review and I had to go back to the attorney to get proper documentation. Ideally, get something that shows: 1) Total settlement amount, 2) Attorney fee amount and percentage, 3) Any costs deducted, and 4) Net amount paid to you.

Does anyone know where exactly on the tax forms this goes? Is it like a business expense or something else? My settlement was for $75k but attorney took $30k and I'm trying to figure out how to enter this in TurboTax.

Be very careful about which line you use on Schedule 1 for the attorney fee deduction. The IRS has specific requirements for employment discrimination settlements under IRC Section 62(a)(20). You'll want to use Schedule 1, Line 24z "Other adjustments" and write "Attorney fees - employment discrimination settlement" in the description. Don't put it under legal fees or business expenses, as those have different rules and limitations. Also, make sure your settlement actually qualifies as "employment discrimination" - this includes claims under Title VII, ADA, ADEA, and similar federal employment laws. Some employment settlements (like wrongful termination based solely on state contract law) might not qualify for the above-the-line deduction. Keep all your documentation together: the settlement agreement, 1099 form, attorney fee agreement, and any correspondence that clearly identifies the nature of your discrimination claim. The IRS has been more aggressive about reviewing these deductions lately.

I went through this exact situation two years ago with my age discrimination settlement. One thing I wish someone had told me earlier - if your settlement includes both back pay and other damages (like emotional distress), you might need to treat different portions differently for tax purposes. The back pay portion is subject to employment taxes (Social Security, Medicare) even though it's being paid as a settlement, while other damages typically aren't. My attorney didn't break this down clearly in the initial paperwork, and I had to go back and request a detailed allocation between back pay and other damages. Also, don't forget that if your settlement includes interest or punitive damages, those portions are always fully taxable regardless of the attorney fee deduction. Make sure your attorney provides a breakdown of what each portion of the settlement represents - it can make a significant difference in your final tax liability. The good news is that once you get all the documentation sorted out, the above-the-line deduction really does work as described. I saved about $8,000 in taxes by properly deducting my attorney fees rather than trying to claim them as itemized deductions.