You finally see your discrimination case resolved and you ask, “Am I going to be taxed on all of this?” Some may ask further, “Can I deduct attorney's fees if I am taxed?” Of course, if your litigation lawyer is not a tax attorney the response is typically "I am not a tax attorney so I cannot tell you." So, what do you do?

You can go to a tax attorney, but typically there is a cost to do so. Can you do anything to avoid drifting into a tax bog that results in you paying taxes on money paid to your attorney?

The Internal Revenue Code addresses the issue generally, and you can review that and then take this information to an accountant or tax preparer. Here is a reduced version of the Internal Revenue Code on this issue which is a bit easier to wade through than the entire section:

26 U.S.C. §62

(a) General rule.  For purposes of this subtitle, the term “adjusted gross income” means, in the case of an individual, gross income minus the following deductions:

(20) Costs involving discrimination suits, etc.

Any deduction allowable under this chapter for attorney fees and court costs paid by, or on behalf of, the taxpayer in connection with any action involving a claim of unlawful discrimination (as defined in subsection (e)) or a claim of a violation of subchapter III of chapter 37 of title 31, United States Code, or a claim made under section 1862(b)(3)(A) of the Social Security Act (42 U.S.C. 1395y(b)(3)(A)). The preceding sentence shall not apply to any deduction in excess of the amount includible in the taxpayer's gross income for the taxable year on account of a judgment or settlement (whether by suit or agreement and whether as lump sum or periodic payments) resulting from such claim.

It goes on further to provide:

(e) Unlawful discrimination defined. For purposes of subsection (a)(20), the term “unlawful discrimination” means an act that is unlawful under any of the following:

(18) Any provision of Federal, State, or local law, or common law claims permitted under Federal, State, or local law—

(ii) regulating any aspect of the employment relationship, including claims for wages, compensation, or benefits, or prohibiting the discharge of an employee, the discrimination against an employee, or any other form of retaliation or reprisal against an employee for asserting rights or taking other actions permitted by law.

Notice the breadth of that description of unlawful discrimination - any case involving state or federal law including common law, and involving the employment relationship. That could be a disability benefit claim, life insurance benefit claim, health insurance benefit claim, and race or gender or age or religious discrimination or many other cases. It could further involve claims for wages or compensation.  It may also help to refer to resources of Robert W. Wood, Esq., a tax attorney, who is the author of Taxation of Damage Awards and Settlement Payments, and Qualified Settlement Funds in Section 468B. These too can be taken to an accountant. While a litigator may not be able to help with tax law concerns, a certified public accountant or a tax attorney can and after reviewing the above resources it will likely be worth seeking their assistance.