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Someone I know paid around $1000 last year to consult lawyers regarding a threatening letter from a former employer related to company confidential information where they threatened lawsuit and contacting their current employer regarding confidentiality agreements but there was no lawsuit eventually. The lawyer gave the person advice and that was pretty much the end of it.

Year 2018 taxes, Form 529 says this and it's a legal expense that was incurred trying to defend against a former employer:

"You can deduct legal expenses that are related to doing or keeping your job, such as those you paid to defend yourself against criminal charges arising out of your trade or business."

  • Does this legal expense qualify as the expense covered under this category?

  • Which forms and lines to deduct them in federal and CA state, as above-the-line deductions?

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    Are you a W-2 employee or a 1099 contractor? – Harper - Reinstate Monica Apr 16 at 22:56
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    W-2 employee. how does it matter though? isn't in either instance someone is trying to practice his trade/expertise/business? The other issue seems to be that pub529 doesn't clarify if they're referring to 'above-the-line' deduction (schedule-1 line 36) or as an itemized one (limited to 2% AG) when using this language. – Guest Apr 17 at 2:29
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    I would think so, but I haven't researched it enough to feel sure. I think a lot of people are expecting to find a "bright line" distinction between employee and small business owner, and they are reading that distinction into the writing (and your quote doesn't make any sense that way). What I feel sure about is lawmakers and IRS don't see a bright line. They certainly don't care whether you're paid via W-2, 1099 or a till. – Harper - Reinstate Monica Apr 17 at 13:26
  • both fascinating and depressing information, @Harper ! – Fattie Apr 17 at 15:05
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According to Stephen Fishman at Lawyers.com, the legal fees in your case are not deductible.

Examples of [personal] attorney fees you may not deduct include fees for:

...

  • legal defense in a civil lawsuit or criminal case

...

  • lawsuits related to your work as an employee

Your acquaintance's case appears to fall into these categories.

And yes, that seems to be in conflict with the language on Publication 529. I suspect that is because the quoted part of the Lawyers.com article is addressing personal legal fees, while the Pub. 529 language is referring to business legal fees.

Pub. 529 wording

The wording from Pub. 529 is:

"You can deduct legal expenses that are related to doing or keeping your job, such as those you paid to defend yourself against criminal charges arising out of your trade or business."

26 U.S. Code § 62(a)(1) uses the same "trade or business" language:

... deductions ... which are attributable to a trade or business carried on by the taxpayer, if such trade or business does not consist of the performance of services by the taxpayer as an employee.

So, the deductibility appears to hinge on the "W-2 or 1099" question asked by Harper.

  • I would judge Pub. 529 as more directly on-point. That lawyer is trying to cover a whole lot of ground, and is not able to drill into any particular paragraph very deeply. That is where mistakes get made. Anyway, the purpose of that document is to troll clients, which the industry calls "Content Marketing". Accuracy is not held to the highest standard. I mean it isn't bad like most content marketing I work with, but you can never quite trust it. – Harper - Reinstate Monica Apr 16 at 23:00
  • @Harper Fair enough. Further research causes me to think the part from Pub. 529 that refers to "trade or business" uses that language specifically to exclude "as an employee". Thus, your question about W-2 or 1099 will likely be quite significant. – Doug Deden Apr 16 at 23:15
  • @Harper Added the comment about w-2. – Guest Apr 17 at 2:30
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    Wow, what a subtle issue! – Fattie Apr 17 at 10:39
  • @Fattie Weirder still. see my comment to OP. – Harper - Reinstate Monica Apr 17 at 13:28

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