How to Deduct Attorney Fees From an Employment Settlement on Taxes

Before 2004, you could deduct attorney's fees in employment cases only as a miscellaneous deduction, which meant only the amount in excess of 2 percent of your adjusted gross income, and you had to itemize your deductions. However, the American Jobs Creation Act of 2004 allows you to deduct attorney's fees from employment discrimination settlements as an adjustment to income. Knowing how to take the deduction can save you a significant amount on your income taxes.

File your taxes with Form 1040 so that you can take the deduction for your attorney's fees. Other forms do not allow the deduction.

Write "UDC" and the amount of the attorney's fees next to line 36 of Form 1040. For example, if you paid $100,000 in attorney fees, write "UDC $100,000" next to line 36.

 

Subtract the attorney's fees, as well as any other adjustments to income you are eligible to claim, from your total income for the year. For this example, if your total income equals $540,000, and you have $12,000 in other adjustments to income, enter $428,000 as your adjusted gross income on line 36.