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I am in negotiations for a work related settlement and need

to know what I would...
I am in negotiations for a work related settlement and need to know what I would net after the laywer gets fees (let's say $15k) plus 30% contingency and what I can write off in terms of the legal fees. I've read that if the sexual harassment settlement is taxable, the 30% would be a write off, even though the full settlement, including the 30% would be considered taxable income to start. What does that mean? Is it true? Would the total taxable amount of the settlement be reduced by the 30% plus fees that I need to pay the lawyer? I want to look at various settlement amounts, including $695k $350k $250k $200k. Thank you. I am in California and expect that I will earn about 50k in salary this year.
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Answered in 1 hour by:
8/1/2012
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 30,689
Experience: Taxes, Immigration, Labor Relations
Verified
Hi and welcome to Just Answer!
Your general understanding is correct.
However - you will include into your gross income the total amount of settlement- and then separately will deduct attorney fees and other legal expenses.
Generally - you may be able to deduct attorney fees and court costs paid in connection with the civil action on Schedule A (Form 1040). You can only claim these expenses as a miscellaneous itemized deduction subject to the 2%-of-adjusted-gross-income limit on Schedule A (Form 1040), line 23.

However, 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.

I will provide estimation of your possible tax liability:
With taxable income $50k - assuming single, standard deduction, no dependents, no other deductions or credits - your estimated federal income tax liability is ~$6200
With additional taxable income $200k - your estimated tax liability $64,000
With $250k - $80,000
With $350k - $115,000
With $695k - $235,000

Please be aware these are very raw estimations.
Let me know if you need any help.
Please be sure to ask for clarification if needed.
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Customer reply replied 5 years ago
Hello Lev, thank you for replying, I am a bit confused about the 2% of income that you mentioned could be lpisted on a schedule A...

My claim is not against a government agency, it is a private corporation.

Thank you for breaking down the raw estimates. How will the deductions affect how much I would actually net, though?

This is an unlawful discrimination settlement based on sexual harassment...would this apply to IRS code 62(e)? What is the difference between claiming it here versus thee schedule A?

Please note that I've never really filed more than a simple tax return (1040), so my understanding of how this all works is quite limited.

Customer reply replied 5 years ago
Also, do the figures include my liability to the state of California? What are the additional taxes, if not? Thank you.
Yes - if that is an unlawful discrimination settlement - you will deduct attorney fees and court costs as an adjustment to income on Form 1040, line 36 (so-called above-the-line deduction).
That is more beneficial because:
-- your adjusted gross income will be reduced by that deduction
-- you are not required to itemize to claim the deduction
-- there is no 2%-of-adjusted-gross-income limitation for the deduction.

To be précised - you need to verify your settlement agreement or consult with your attorney. Specifically for section 62(e) - see here - http://www.law.cornell.edu/uscode/text/26/62
e) Unlawful discrimination defined
For purposes of subsection (a)(20), the term “unlawful discrimination” means an act that is unlawful under any of the following:
(1) Section 302 of the Civil Rights Act of 1991 (2 U.S.C. 1202). [2]
(2) Section 201, 202, 203, 204, 205, 206, or 207 of the Congressional Accountability Act of 1995 (2 U.S.C. 1311, 1312, 1313, 1314, 1315, 1316, or 1317).
(3) The National Labor Relations Act (29 U.S.C. 151 et seq.).
(4) The Fair Labor Standards Act of 1938 (29 U.S.C. 201 et seq.).
(5) Section 4 or 15 of the Age Discrimination in Employment Act of 1967 (29 U.S.C. 623 or 633a).
(6) Section 501 or 504 of the Rehabilitation Act of 1973 (29 U.S.C. 791 or 794).
(7) Section 510 of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1140).
(8) Title IX of the Education Amendments of 1972 (20 U.S.C. 1681 et seq.).
(9) The Employee Polygraph Protection Act of 1988 (29 U.S.C. 2001 et seq.).
(10) The Worker Adjustment and Retraining Notification Act (29 U.S.C. 2102 et seq.).
(11) Section 105 of the Family and Medical Leave Act of 1993 (29 U.S.C. 2615).
(12) Chapter 43 of title 38, United States Code (relating to employment and reemployment rights of members of the uniformed services).
(13) Section 1977, 1979, or 1980 of the Revised Statutes (42 U.S.C. 1981, 1983, or 1985).
(14) Section 703, 704, or 717 of the Civil Rights Act of 1964 (42 U.S.C. 2000e–2, 2000e–3, or 2000e–16).
(15) Section 804, 805, 806, 808, or 818 of the Fair Housing Act (42 U.S.C. 3604, 3605, 3606, 3608, or 3617).
(16) Section 102, 202, 302, or 503 of the Americans with Disabilities Act of 1990 (42 U.S.C. 12112, 12132, 12182, or 12203).
(17) Any provision of Federal law (popularly known as whistleblower protection provisions) prohibiting the discharge of an employee, the discrimination against an employee, or any other form of retaliation or reprisal against an employee for asserting rights or taking other actions permitted under Federal law.
(18) Any provision of Federal, State, or local law, or common law claims permitted under Federal, State, or local law—
(i) providing for the enforcement of civil rights, or
(ii) regulating any aspect of the employment relationship, including claims for wages, compensation, or benefits, or prohibiting the discharge of an employee, the discrimination against an employee, or any other form of retaliation or reprisal against an employee for asserting rights or taking other actions permitted by law.


Estimations above are for federal taxes only.
California state income taxes will be extra - as a raw estimate - you may use 8-9%.
Let me know if you need any help.
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Customer reply replied 5 years ago
You are wonderful. A few final questions...please help me do the math. If I get $200k on top of salary...and have 15k in lawyer bills plus 30% contingency fee on the $200k, and I do the 1040 line 36, including estimated tax to California of 9% plus the federal tax liability, what is total estimated tax liability? Do the taxes thatbhave already been taken out of my paycheck/W2 count toward paying that?

Sexual harassment should fall under 18 (ii), right?

Finally,, since I don't know what the actual final settlement figure will be, is there a method to the madness? A calculation I can apply to the final total gross income to get my estimate of total tax due to Federal and State? Thank you very, very much for your time and help.
If you will get $200k- that amount will be reported on form 1040, line 21.
That amount will be added to your $50k wages.

For the unlawful discrimination case - you will deduct contingency fees and other legal expenses on form 1040, line 36 - $75k
So your adjusted gross income will be $175k
In this case your estimated tax liability (assuming single, standard deduction, no other deductions) - your estimated tax liability would be
-- federal - $39,900
-- CA - ~$15,000

Do the taxes that have already been taken out of my paycheck/W2 count toward paying that?
Yes any withholding and estimate payments are credited against your tax liability. By the way - you may request that income taxes (federal and state) are taken out from your payment.

Sexual harassment should fall under 18 (ii), right?
Most likely - yes. But that should be verified with your settlement document.

Finally,, since I don't know what the actual final settlement figure will be, is there a method to the madness? A calculation I can apply to the final total gross income to get my estimate of total tax due to Federal and State?
For the federal - you need to verify your actual tax bracket - see tax rate schedule on last page of this publication - www.irs.gov/pub/irs-pdf/i1040tt.pdf
For state all amount above $46k is taxed at 9.55% - so you will easy calculate. For instance additional $10k in taxable income will result $955 if CA tax liability.

Let me know if you need any help.
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 30,689
Experience: Taxes, Immigration, Labor Relations
Verified
Lev and 87 other Tax Specialists are ready to help you
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Customer reply replied 5 years ago
Thank you for all of your help!
You are very welcome!
When you will know your actual settlement amount - be sure to come back - and I will help to adjust our estimation.
Also - we will think about steps to reduce your tax liability.
Do not delay till the end of the year! As soon as you know the amount - come back - and we will try to workout the path forward
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Customer reply replied 5 years ago
How wonderful of you. Thank you. Connect with you then.
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Lev
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 30,689
30,689 Satisfied Customers
Experience: Taxes, Immigration, Labor Relations

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