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BK-CPA
BK-CPA, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 933
Experience:  Owner of a CPA firm
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I was hired in a company in 2013. As part of my agreement,

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Hi:
I was hired in a company in 2013. As part of my agreement, the Company paid lump sum as a sign on bonus. It was agreed on that I will stay 2 years with the company or pay the bonus back to the company. In 2013 W2 and tax return, I paid the taxes on this bonus. The company did something very bad to me (discrimination) and I left the company after a year. The company sued me to get the bonus money they paid. I hired a lawyer, but was unable to continue the fight as lawyer's bill was piling up. I made a settlement with the company and agreed to pay back every month to the company. Since then, I am paying the company each month and also paying the lawyer bill. My question is : what can I do to deduct the lawyer cost and what can I do for the money I am paying to the company that IRS already taxed me before?
Submitted: 8 months ago.
Category: Tax
Expert:  BK-CPA replied 8 months ago.
Hello and thank you for your question. The amount you are paying to your attorney is a miscellaneous itemized deduction in this case. You can claim it on Schedule A of Form 1040. Note - There is a special deduction for attorneys' fees involving discrimination suits, but it's limited to amounts recognized as income from settlements... yours goes the other way as you're fighting to keep the money but will otherwise claim a credit or deduction when you repay it. I.R.C. §§ 62(a)(2), 212(a). When you pay back the amounts that you previously paid tax on, you will be entitled to a deduction or credit under I.R.C. § 1341: https://www.law.cornell.edu/uscode/text/26/1341 The computation isn't the easiest, depending on whether you claim a deduction or a credit. You could simply claim a deduction of the amounts you repay on Schedule A, but this tends to be the least beneficial method. To figure the credit, you have to recompute your prior year's tax when you received the bonus as though you did not receive it. The difference between what you paid in tax and what you have to pay back is generally the credit. The IRS provides some information that will be helpful in Publication 17 (the link is to the specific section of the Pub that will be of interest to you): https://www.irs.gov/publications/p17/ch12.html#en_US_2015_publink1000172015 Note that if the amount you repay is $3,000 or less, you deduct it as a miscellaneous itemized deduction subject to the 2% of AGI limitation (line 23 of Schedule A). If the amount you repay is more than $3,000, you are not subject to the 2% limitation and may deduct on line 28 of Schedule A or compute the credit and claim it on Form 1040, line 73. You'll want to note the Form 1040 instructions for line 73 too if you claim the credit: https://www.irs.gov/instructions/i1040gi/ar01.html#d0e9362 Line 73...If you are claiming a credit for repayment of amounts you included in your income in an earlier year because it appeared you had a right to the income, include the credit on line 73. Check box d and enter “I.R.C. 1341” in the space next to that box. See Pub. 525 for details about this credit. IRS Pub 525 gives further details and examples: https://www.irs.gov/publications/p525/ar02.html#en_US_2015_publink1000229600 This is about as much information as I can give over JustAnswers for what is potentially a bit of a tricky situation. I suppose it's fairly simple if you repay less than $3,000 during the year. Good luck!
Customer: replied 8 months ago.
Thanks for the response. My attorney fee is about $15000 in the discrimination lawsuit (which I was unable to continue as legal expense was high) and much higher than 2% AGI limitation. Where should I report this in schedule A and for 1040?Regards
Expert:  BK-CPA replied 8 months ago.
The attorney's fees may be reported on line 23 of Schedule A as a miscellaneous itemized deduction subject to the 2% limitation. Thank you!
Expert:  BK-CPA replied 8 months ago.
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