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 Dear Tax Talk:
In 2007 I received $40,000 and another lady received $90,000 in punitive damages for unlawful discrimination (work related). The attorney was paid $233,000 separately for his work, by the employer. They did not withhold taxes and gave us a 1099 (other income). Can we deduct the attorney fees as paid on our behalf, although we all got separate checks?
-- Janice
 Dear
Janice,
Work-related discrimination claims are considered
income and need to be included on your tax return.
In order for you to deduct the attorney fees,
they would have to be included in the award to
you and you would have had to pay over the amount
to the attorney. Because this would be a wash
to you on your tax return, there is no net deduction
to you.
Under the law in effect prior to Oct. 22, 2004, a plaintiff in the same situation would be required to include the full settlement in income including the attorney's fees and would only be allowed the attorney's fees as a miscellaneous itemized deduction. Because a miscellaneous itemized deduction is not allowed as a deduction in computing alternative minimum tax, the treatment was far from a wash on his or her tax return.
Your claim may involve a payment for back wages, which could be considered W-2 wages rather than 1099 income. You should check with your attorney to determine that the payment is properly reported. You should not owe self-employment taxes on the payment. If it does not belong on a form W-2, then the amount should be reported in box 3 of Form 1099-Misc.
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