Legal Expenses Related to Damages
Whether you receive damages for an employment-related situation or a personal injury case, it is important to understand the taxability of your settlement.
Business or Employment Related
Legal fees for defending and filing damage suits in a taxpayer’s business or in employment are deductible. Examples are:
-
Defending suit for wrongfully taking property.
-
Corporation’s defense of its position before the National Labor Relations Board related to liability for compensatory damages to employees.
-
Settlement of damage suit in business that could help avoid adverse publicity and controversy.
-
Getting a judgment for damages to rental real estate.
-
Teacher’s action of sex discrimination against a university.
Damages for Personal Injury or Sickness
To the extent a taxpayer can’t exclude from income a portion of an otherwise tax-free personal damage award--e.g. due to payment of interest accruing on the settlement funds-- the legal costs are deductible.