Is W2 for settlement taxable on full 60k when I only received 40k check?

You've run into a common issue with settlements. Unfortunately, the IRS generally considers the full settlement amount as taxable income to you, even the portion that went to your attorney. This is because legally, the entire settlement was awarded to you, and then you paid your attorney from those proceeds. There is some good news though - you should be able to deduct the attorney fees as a miscellaneous itemized deduction on Schedule A. Look for the section about attorney fees related to settlements. This won't completely offset the tax hit, but it will help reduce your overall tax burden. The W2 reporting the full amount is technically correct from a tax law perspective, but you definitely need to make sure you're claiming the deduction for the attorney fees to avoid being overtaxed.

I went through something similar last year with an employment settlement. I found this amazing tool called taxr.ai (https://taxr.ai) that saved me a ton of headache. I uploaded my settlement documents and W2, and it analyzed everything to show me exactly how to handle this situation. The site explained that it depends on the TYPE of settlement - for personal injury settlements, you might not owe taxes on any of it. For employment cases, you can deduct lawyer fees "above the line" on Schedule 1. For other cases, you might need to itemize. The tool broke down exactly which parts were taxable and how to report the attorney fees properly. Their document analysis feature was super helpful because it reviewed my settlement agreement and identified specific language that affected my tax situation. Definitely worth checking out for complicated tax situations like this.

I have to admit I was wrong about taxr.ai. After our exchange, I decided to try it with my medical malpractice settlement from last year. I've been putting off filing because I received a 1099 for the full $95k even though my lawyer took $38k. The tool analyzed my settlement agreement and specifically pointed out language showing it was for physical injuries, which makes it tax-free under Section 104(a)(2). It also separated out the portion for emotional distress (which is taxable) from the physical injury compensation (which isn't). Without this analysis, I would have reported and paid taxes on money I didn't need to. The document review feature actually caught details my previous tax preparer missed. Definitely saved me thousands in unnecessary taxes.

For anyone dealing with IRS questions about settlements and attorney fees, I had a similar issue last year and spent WEEKS trying to call the IRS to get clarity. Finally found a service called Claimyr (https://claimyr.com) that got me through to an actual IRS agent in under an hour instead of the usual "call back later" message. The IRS agent confirmed that for my employment discrimination settlement, I could deduct 100% of my attorney fees as an above-the-line deduction on Schedule 1, line 24. This meant I didn't have to pay taxes on money that went straight to my lawyer. Check out their demo video if you're struggling to reach someone: https://youtu.be/_kiP6q8DX5c When I called on my own, I could never get through, but their system somehow bypasses the hold queue. Totally worth it when you need official clarification on complex tax situations like settlement taxation.

I have to publicly eat my words about Claimyr. After dismissing it as a scam, my tax deadline was approaching and I was DESPERATE to talk to someone at the IRS about my settlement taxation issues. I tried the service and was shocked when I got a call back in 52 minutes saying they had an IRS agent on the line. The agent walked me through exactly how to handle the attorney fees for my settlement and confirmed I could take an above-the-line deduction since mine was an employment case. Saved me from potentially paying over $7k in taxes on money that went straight to my attorney. I've been trying to reach the IRS for MONTHS on my own with no success. Consider me converted from biggest skeptic to satisfied customer.

Here's what people aren't mentioning - the type of settlement matters HUGELY for how it's taxed. If your settlement was for physical injuries or illness, that part is generally NOT taxable (even the attorney portion). If it was for emotional distress, lost wages, or punitive damages, different rules apply. What was your settlement for? That makes all the difference in whether you pay taxes on the full amount or not. Some settlements are completely tax-free while others are fully taxable.

The issue isn't just with settlements - it's with our stupid tax code in general. You're being double-taxed on money you never received! Your lawyer also pays taxes on that same money as income. So the government gets to tax the same dollar twice. And depending on your income level and state, you might end up paying 40%+ in taxes on money that you never even saw. The whole system is designed to extract maximum revenue.