I know that you are engaging a lawyer to assist you in obtaining damages for your claim.
You need to know that in many cases the government hits your lawsuit award or settlement with the double whammy of
- a tax bill on the gross dollar amount of the award or settlement and
- a reduction to or even elimination of your legal fees tax deduction.
If you win your case, I can’t make the taxable part of the award disappear if the award isn’t due to a physical injury or illness.
But with some tax planning, I can help you increase the possibility of turbocharging your legal deductions. To make this happen, you need to qualify the legal fees deduction as an adjustment to income.
An adjustment to income is much more valuable to you than the standard legal fees deduction:
- You don’t have to itemize deductions to benefit from the adjustment.
- There’s no 2 percent of adjusted gross income (AGI) threshold to meet before you get your adjustment.
- You don’t add the adjustment back to your income for alternative minimum tax (AMT) purposes.
- Since the adjustment lowers your AGI, you might be able to take tax breaks for lower-AGI tax deductions (such as education credits) or avoid taxes on higher-AGI tax triggers (such as the net investment income tax).
To qualify for this favorable above-the-line treatment, you must pay the legal fees in connection with an action involving one of the following types of claims:
- Unlawful discrimination
- Certain claims against the United States government
- A private cause of action under the Medicare Secondary Payer statute