Tax Deductible Legal Fees for SSI
Supplemental Security Income, or SSI, is a monthly payment made by the federal government to persons of low income who are over age 65, disabled or blind. The amount of the payment is based on need, and in order to obtain SSI benefits, most people have to hire an attorney. Legal fees involved may or may not be tax deductible, depending on the circumstances. You can deduct legal fees on your income tax if you hired an attorney to help you collect a taxable income or to collect a tax refund. SSI is not a taxable income. However, there may be circumstances that would allow you to deduct legal fees when Social Security Disability Insurance is being considered along with the SSI, or if you have other income.
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Social Security Disability Insurance
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If you have worked enough to pay into Social Security, and you become disabled before the age of 65, you may qualify to receive Social Security Disability Insurance, or SSDI. This is the same as Social Security benefits.
Hiring an Attorney
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A good majority of attorneys take SSI and SSDI cases on a contingency basis. That is, they don't get paid unless you win your case. In these instances, the Social Security Administration pays them directly. Usually, the amount is up to 25 percent of the amount you are awarded, with a limit of around $5,500, whichever is less. For instance, if the SSA determines you are owed a lump sum of $20,000 for the months you were disabled, the attorney would get $5,000. If they determine you are owed $30,000, the attorney would get $5,500. This fee does not include other costs accrued by the attorney, such as expert witnesses and other testimony costs. These costs must be approved by the SSA. If they approve an amount that is greater than your settlement, you will be responsible for the difference. This difference, by definition, is the amount that you could claim on your income tax.
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Taxable Income
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As with regular Social Security, SSDI is taxable, or partially taxable, depending on your provisional income. Provisional income is a total of all your income, non-taxable included. For example, if you are single (amounts are adjusted for filing jointly, head of household, etc.) and your provisional income is less than a base amount of $25,000, you won't owe any taxes. If your provisional income is between $25,000 and $34,000, half of your SSDI over the $25,000 is taxable. If your provisional income is over $34,000, then $4,500 plus 85 percent of your SSDI over $34,000 is taxable.
For example, if you received SSDI in the amount of $10,000, and you had additional income of $16,000 (provisional income of $26,000), you would pay taxes on $5,000. If you had additional income of $25,000 (provisional income of $35,000), you would pay taxes on $13,000 ($8,500 plus $4500).
How to Deduct Attorney's Fees
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Attorney's fees are usually indicated as a miscellaneous deduction on Schedule A of your tax return. When you add all of your miscellaneous deductions and the total is more than 2 percent of your Adjusted Gross Income, called AGI (income used to figure how much tax you owe), you can deduct the amount that's over the 2 percent. For example, suppose your AGI is $26,000. Your total miscellaneous deductions would have to be over $520 (2 percent of $26,000).
Conclusions
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There are circumstances that have to come into play before you can deduct attorney's fees for collecting SSI:
1. Attorney's fees are only deductible if you hired an attorney to collect a taxable income.
2. Attorney's fees for collecting SSI alone are not eligible for a tax deduction.
3. Your provisional income has to be over $25,000 in order to pay taxes and to be able to itemize deductions.
4. If you hired an attorney to collect SSDI, along with SSI, the only attorney's fees that you can deduct on your income tax are the ones that the SSA doesn't pay; that is, the amounts over your lump sum SSDI settlement.
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