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Yes, the interest income
would be taxed as ordinary income
. With respect to the settlement, if the settlement is taxable to you, then you can deduct the attorney fees to collect the settlement. IRS
Publication 17 (http://www.irs.gov/publications/p17/ch28.html) provides as follows:
You can usually deduct legal expenses that you incur in attempting to produce or collect taxable income
or that you pay in connection with the determination, collection, or refund of any tax
You can also deduct legal expenses that are:
Related to either doing or keeping your job, such as those you paid to defend yourself against criminal charges arising out of your trade or business,
For tax advice related to a divorce, if the bill specifies how much is for tax advice and it is determined in a reasonable way, or
To collect taxable alimony
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