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Submitted: 2 years ago.Category: Tax
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8/11/2015
Tax Professional: PDtax, Certified Public Accountant (CPA) replied 2 years ago
PDtax
PDtax, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 4,712
Experience: 35 years tax experience, including four years at a Big 4 firm.
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Hi again. PDtax here.

You are assuming that the $40,000 is taxable, but not earned income. 1099-MISC. The attorney fees are also deductible.

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Tax Professional: PDtax, Certified Public Accountant (CPA) replied 2 years ago
CERTIFIED PUBLIC ACCOUNTANT (CPA) ONLY….NO RUSH…THIS IS NOT A DUPLICATE QUESTION Individual A hired an Attorney for a lawsuit and won $40,000. Attorney will receive $15,000 from A for Attorney Fees. Individual A will have a $15,000 expense to offset the $40,000 income. Individual A, I believe and let’s assume will have a 1099 for the $40,000 income. Individual A is just an individual; not a Corporation, Trade or Business etc. The $40,000 is not wages or any type of earned income. The income of $40,000 is reported on form 1040 line 21 as other income. The expense is report on Schedule A line 23 Mis 2% deduction. Question: 1. PROBLEM 1- My net from the award is $25,000 but this trigger and Alternative Minimum Tax of $19,000. When I take the two entries ($40,000 & $15,000) out; the Alternative minimum tax is zero and has always been zero. What is causing the problem? 2. PROBLEM 2-The Attorney Expense of $15,000 on Form Schedule A line 23 is limited to 2% and therefore I am only receiving $9,000 of the expense instead of $15,000?
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Customer reply replied 2 years ago

Individual A hired an Attorney for a lawsuit and won $40,000. Attorney will receive $15,000 from A for Attorney Fees. Individual A will have a $15,000 expense to offset the $40,000 income. Individual A, I believe and let’s assume will have a 1099 for the $40,000 income. Individual A is just an individual; not a Corporation, Trade or Business etc. The $40,000 is not wages or any type of earned income.

The income of $40,000 is reported on form 1040 line 21 as other income. The expense is report on Schedule A line 23 Mis 2% deduction.

Question:

  1. PROBLEM 1- My net from the award is $25,000 but this trigger and Alternative Minimum Tax of $19,000 which is I take the two entries out the Alternative minimum tax is zero and has always been zero. What is causing the problem?
  2. PROBLEM 2-The Attorney Expense of $15,000 on Form Schedule A line 23 is limited to 2% and therefore I am only receiving $9,000 of the expense.

I notice if I put the expense on 28 there is not alternative min. Tax….

I must be reporting this incorrectly….because there should be no Alternative Min. Tax…If I report Schedule A line 28 there is no 2% limitation and there is no alternative min. Tax.

Tax Professional: PDtax, Certified Public Accountant (CPA) replied 2 years ago
1. Note that your $40,000 income is putting you into AMT with $0 withholding.
You did not report filing status or income, but if 2% of AGI is $6,000, AGI would be $300,000. An additional $40,000 could kick your return into AMT.
2. The legal fees are indeed deductible as 2% itemized deductions. Because you report that the income is not earned income, the legal fees are subjected to the 2% floor. If the $40,000 was earned income, you could report the income and total legal expense on a Schedule C and get full deduction for the legal fees. I would try this treatment to see if perhaps your coding of the $40,000 as other income was the AMT error. I bet that the Sch. C reporting fixes both problems.
Thanks for asking at Just Answer. Positive feedback is appreciated. I'm PDtax.
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