I received a nasd arbritration settlement including atty fees on a 1099mis how do you account for the atty fee

Question

I received a nasd arbritation settlement on a 1099 mics form. The attorney fees are included on the misc income form. When completing my taxes I did not find a way to remove the fees to pay taxes only on the net. How can this be accomplished.

Answer 1

Deduction for Discrimination Suit Costs — A new deduction is available for those who pay attorney’s fees and court costs in connection with discrimination suits. Taxpayers can take the new deduction whether they itemize or not. The deduction cannot exceed the amount includible in income for the year on account of a judgment or settlement resulting from the discrimination claim. Generally, personal legal expenses are not deductible, but an employee who incurs legal expenses related to doing or keeping his job could deduct these expenses on Schedule A as a miscellaneous itemized deduction. However, under The American Jobs Creation Act of 2004, an individual with legal fees and court costs arising from a discrimination suit may deduct the costs directly from income on the front of the tax return; this is known as an above-the-line deduction.

Under this new deduction, amounts paid for attorney’s fees and court costs are deductible in computing alternative minimum tax, and are not subject to the 2 percent floor on miscellaneous itemized deductions or the overall limitation on itemized deductions. The Act, signed into law on Oct. 22, 2004, describes the discrimination claims qualifying for this new deduction. Only costs paid after Oct. 22, 2004, for judgments or settlements occurring after that date qualify for this deduction.

You may be able to deduct attorney fees and court costs paid to recover a judgment or settlement for a claim of unlawful discrimination under various provisions of federal, state, and local law listed in Internal Revenue Code section 62(e), a claim against the United States government, or a claim under section 1862(b)(3)(A) of the Social Security Act. You can claim this deduction as an adjustment to income on Form 1040, line 36. The following rules apply.
The attorney fees and court costs may be paid by you or on your behalf in connection with the claim for unlawful discrimination, the claim against the United States government, or the claim under section 1862(b)(3)(A) of the Social Security Act.

The deduction you are claiming cannot be more than the amount of the judgment or settlement you are including in income for the tax year.

The judgment or settlement to which your attorney fees and court costs apply must occur after October 22, 2004.

Publication 525
http://www.irs.gov/publications/p525/ar02.html#d0e7963

Answer 2

There is no way to remove the attorney's fees and pay taxes only on the net.

Enter the settlement amount on Line 21: Other income, not subject to self-employment tax.

Enter the attorney's fees on Schedule A, Miscellaneous Income subject to 2% of AGI.

If you itemize, you may be able to avoid taxes on some of the attorney's fees.

Answer 3

You have to itemize your deductions to claim the attorney's fees. Since the fees were related to the collection of taxable income they are deductible but only if you itemize.

If the fees and your other itemized deductions are more than your standard deduction amount it would be worthwhile to itemize. If they are less than your standard deduction amount, it won't pay to itemize and you therefore won't be able to claim them.

The standard deduction amount depends upon your filing status as follows:

Single or Married Filing Separately: $5,150
Married Filing Jointly: $10,300
Head of Household: $7,550