Tax liability for attorney fees for award in IRA settlement

Submitted by James Baker on Sat, 2021-02-13 17:30

I received a settlement award from a broker for mismanaging my Rollover IRA account. My attorney received a check from the Respondent for the amount of the settlement – $125,000. He subtracted his 33% fee and sent me a check for $83,375 payable to James Baker IRA. I endorsed his check and immediately deposited it into my IRA held at another institution. Finally, I received a 1099-Misc from the Respondent for $125,000.

Research has told me that there is no tax due on the net proceeds of the settlement $83,375, since it is considered a restorative payment. The results of my research on the tax treatment of the Attorney’s fees are less clear. I would argue that since my net award ($83,375) is not taxable, the the associated Attorney fees are not taxable as income. Can someone tell me if there are references specific to this situation, and how to handle the 1099-Mics on my taxes?



Submitted by Alan - IRA critic on Sat, 2021-02-13 19:34

You are probably stuck with 41,625 of taxable income for the attorney fee. While it was problematic even before, some taxpayers probably claimed a misc deduction for the attorney fees, but such misc deductions subject to 2% of AGI floor have been suspended until 2026, so they are off the table. You should show the 125000 as income reduced by 83,375 as a restorative payment, leaving the 41,625 as taxable and include an explanatory statement.

Submitted by Bruce Steiner on Mon, 2021-02-15 02:44

Since it’s the IRA that had the claim, is there an argument that not only is the IRA entitled to the recovery but the IRA should bear the burden of the fees?

Submitted by James Baker on Mon, 2021-02-15 15:54

Thanks, guys. The rule of thumbseems to be that if a settlement is non taxable, the attorney fees are non taxable. Likewise the attorney fees are taxable if the award is. Does the same apply to IRA’s. Unfortunately, several of the so-called experts i conferred with aren’t even aware that IRA awards are not taxed up to the amount of actual losses. I called the IRS and was told by the machine that they couldn’t reply to advanced questions by phone, and I should try the web site. Please continue with your input.  

Submitted by Alan - IRA critic on Mon, 2021-02-15 18:12

The attorney issued the 1099, so they must believe the fees are taxable. And the award does produce taxable income, but due to the restorative payment the taxes will not be due until IRA distributions commence.

Add new comment

Log in or register to post comments