Employees file wrongful termination lawsuits for many reasons. An employee may believe the termination was wrongfully based on his or her ethnic background, gender, race or age. Employment-at-will laws allow an employer to fire an employee without cause or notice as long as the firing doesn't violate state or federal laws. However, the fired employee may think otherwise and file a wrongful termination lawsuit. Both the employer and the employee are entitled to deduct the legal fees resulting from the wrongful termination lawsuit.
Employee Tax Deduction
As an employee, you can deduct a limited amount of your legal fees stemming from a wrongful termination lawsuit, according to the IRS. The reason you were fired is immaterial. The legal fees are deductible in civil actions, such as discrimination or whistle-blowing cases, and in criminal cases, such as fraud or embezzlement. You must have paid your legal fees to take the deduction, and deduct your legal fees in the year you paid them. You can deduct your legal fees whether you win or lose your lawsuit.
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Employee Deduction Limits
The IRS caps your deduction to the amount your legal fees exceed 2 percent of your Adjusted Gross Income shown on your 1040 tax return. To calculate the amount, multiple your AGI by 2 percent. For example, if your AGI is $50,000, your 2 percent limit is $1,000: $50,000 multiplied by 2 percent. You can deduct your legal fees that exceed $1,000. For example, if your legal fees are $10,000, you can deduct $9,000 on your Schedule A: $10,000 minus $1,000. You don't get a deduction if your legal fees are less than $1,000.
Employer Legal Deductions
As a business employer, you're entitled to deduct legal fees for business employment-related matters. You can deduct the legal fees for defending against a wrongful termination lawsuit. Unlike an individual employee, there is no cap limiting the dollar amount of legal expenses the business can deduct. You must, however, pay the bill first before you can take the deduction. You can deduct the fees regardless if you win the lawsuit or lose.
Employer Deduction Amount
You deduct your legal expenses on Schedule C. The wrongful termination legal fees are added to any other legal fees you paid on behalf of the business. You deduct the legal fees in the year you paid them, not in the year the lawsuit is concluded. The total amount of legal fees you paid for the year is reported on Line 17. You file the Schedule C along with your 1040 tax return.