Tax Deduction for Attorneys' Fees
Most lawyers who handle Social Security disability cases charge a standard fee of 25% of your past-due benefits, with a cap of $6,000. (The fee may work somewhat differently if your case goes to the Appeals Council or requires multiple hearings.) If you win your disability claim, Social Security will pay the attorney fee directly to your lawyer, and you'll receive the remainder.
If some of your lump sum turns out to be taxable, you can deduct the fee paid to your attorney from your disablity benefit income, but only on a pro rata basis. For example, if 40% of your lump sum payment was counted as taxable income, you may deduct 40% of your attorney's fee. You list this deduction on Schedule A of your return, under miscellaneous deductions. Note that you must file an itemized return to claim this deduction, and that you can deduct only the amount that exceeds 2% of your adjusted gross income.
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