Taxpayer asks:
Hello and thanks for your anticipated help. I have a question:
I am an attorney (solo pracitioner) and last year I settled my first case. I obviously gave the proceeds minus my attorney fees to my client.
I received a 1099 from the govt agency that I settled the lawsuit with. Do I now turn around and issue a 1099 to the cleint that for the amount of the money that I gave to him?
Taxgirl says:
This is a tricky question.
Let me preface my answer by saying that the best practice to avoid confusion with respect to reporting requirements is to request separate checks, when possible, from a defendant in a lawsuit. In that way, the defendant would be responsible for issuing the 1099 to the client (the defendant would also issue a 1099 to you for your fee).
Of course, hindsight is 20/20 and you have a situation where you already have check and 1099 in hand. This isn’t my forte (as I’m never in a position to accept money on behalf of a client) but here’s what I would advise.
To the extent that you are aware that it’s taxable income to the client, I would issue a 1099 to the client as a reminder to report the income.
If you are aware that it is not taxable income to the client, there would be no need to issue a 1099.
In both circumstances – whether you issue a 1099 or not – you are eligible to deduct the amount paid to the client on your tax return. I would document it on the return as an annotation if you have concerns about the amount of the deduction.
(Interestingly, if paid to the client instead of the attorney, the large deduction on the client’s end for attorney’s fees makes the client a candidate for AMT…)
I’d be interested to hear how other attorneys handle this matter, or how other tax professionals advise clients who are attorneys. Thoughts? Comments?
Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.
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{ 2 comments… read them below or add one }
Why would extremely large deductions of this nature make him a candidate for the AMT?
As a solo practitioner attorney, he would presumably report the deduction as a business expense on a Schedule C or perhaps an 1120S.
I don’t see how it could possibly be a tax preference item subject to AMT.
You’re right. I was posting at midnight and wrote faster than I could think – I meant to say that if proceeds were payable to the client, it would make the CLIENT a candidate for AMT. I’ve fixed it in the post.