SSDI Attorney Fees Explained
Lawyers helping people obtain Social Security Disability Insurance (SSDI) face a very real problem when it comes to the payment of fees for their services. This can lead us into some confusion about "fee shifting" agreements in general. When I take your case for you as an attorney, my clients and I have agreed to a contingency fee arrangement. We’ve entered into a contract that when we go before a judge together, the judge will authorize the payment of a reasonable fee when my client receives SSDI benefits from the Social Security Administration (SSA). Attorneys representing SSDI claimants know, especially going into administrative hearings, that there isn’t much the judge can do to authorize parting with your money. To be more specific, if I want a fee from someone’s disability payments and they don’t agree to pay me the amount of my fee, then when it comes time to make that payment I’m going to lose because legally I have no basis to mandate that someone send me their money without their express written agreement. Therefore, attorneys representing SSDI claimants go into court with the sole purpose of asking a judge to approve the appointment of themselves as the attorney who has represented the claimant throughout the legal process. That is the sole purpose of the role I serve before a judge in these cases .
Thus, an SSDI claimant’s attorney goes to the administrative hearing where that purpose is performed (the due process and fee shifting question are presented by the attorney, not the judge, and the judge approves and signs the document). The attorney has done their job – they represented the claimant through all stages of the legal case and asked for what is lawfully mandated. The judge reviews the request and signs off on it and a check is sent to me.
It’s important to understand that while this is a "fee shifting" arrangement (the mechanism by which an attorney receives payment for work done by being paid out of the SSDI benefits the claimant receives), there is no issue here of a judge ruling in favor or disfavor of an attorney in order to reward or punish that attorney. The fee shifting is mandatory and not discretionary (which is why it is allowed) so no one could be prejudiced or favored by a judge who is duty bound to approve the fee petition of an attorney, assuming the fee petition is lawfully made (which in my experience, about 99% of them are lawfully made as required by law). Thus, in a sense, the "fee shifting" is like an advanced payment of the money to which I have a lawful claim at the end of the business transaction.
IRS Requirements for Allowed Taxable Expenses
While you may assume that legal fees are not tax-deductible, the Internal Revenue Service has provided some guidelines concerning attorney fees. The IRS indicates that you are allowed a tax deduction for legal fees incurred in connection with legal actions that produce taxable income or result in a tax refund or reductions in your taxes.
In income producing cases, the tax deduction for the attorney fees is limited to the amount of the taxable income associated with the action. As an example, in social security disability cases, it is common for a claimant to hold a substantial balance of overpayments that must be addressed by the Administrative Law Judge if a favorable decision is issued. The law states that the excessive overpayment liability is generally excluded from income determination and the overpayment liability should not be added to the benefit award that is subject to attorneys fees. So for example if an award for $1,000.00 is made with a 25% fee of $250.00, but there is an offset for overpayment of $10,000.00, the only income that should be taxed is $1,000.00 not the total of $11,000.00. Again, only the $1,000.00 would be subject to attorney fee deduction in your favor. The portion that is subject to deduction will vary depending on each individual case scenario but generally speaking, this is how IRS guidelines are supposed to be upheld in Social Security Disability cases. Unfortunately, the IRS does not distinguish between SSI and SSD cases as far as overpayment does not apply to SSD cases. However, one can argue to be consistent with the overall intent of the law, the overpayment should not count against one’s income in a SSD case for the purpose of attorney fee deduction.
For legal actions that produce a tax refund or a reduction in taxes, the deduction does not include any portion of the fee allocable to the portion of the refund or reduction in taxes that is not taxable. Here again is another portion that comes into play in social security disability cases. Sometimes, particularly with certain insurance plans, the insurance company may contact the insurance company for the claimant and inform them that they owe a duty to repay benefits that were received on a continuing basis in the form of a SSDI award. This too could potentially reduce the amount of taxes that will be due on the SSD income. Just because the IRS does not separate the SSI and SSD type benefit for the purpose of taking deductions, does not mean that the client may not benefit from what seems to be a small difference but in the long run, may complicated the final breakdown of a potential attorney fee deduction in SSD claims that have a good sized overpayment or settlement of the overpayment.
Are SSDI Attorney Fees Tax Deductible
Attorney fees related to a Social Security Disability (SSDI) case are tax deductible. This is because attorney fees that relate to an action that results in taxable income appear on IRS Schedule A under "Miscellaneous deductions." IRS Publication 529 explains this. On the Schedule A, attorney fees for SSDI are miscellaneous itemized deductions subject to the 2% floor, meaning you can only deduct fees to the extent that if, in addition to your other miscellaneous deductions, the total of your miscellaneous expenses exceeds 2% of your adjusted gross income for the year. Under IRC § 2116, however, the deduction for qualifying attorney fees relating to Social Security Disability benefits is not subject to the 2% floor. So, if you are awarded SSDI, and if you have paid attorney fees that are billed by your attorney on a contingency fee basis, you can deduct those fees without having to worry about the 2% floor. There is no other major restriction that would affect the deductibility of SSDI attorney fees. Given the small size of the deduction, one often wonders whether it is necessitate to bother tracking down old invoices for payment of SSDI attorney fees occurring in prior years, or bother filing to recover such attorney fee expenses.
Exceptions to this Rule, and Special Situations
Although attorney fees are generally not tax deductible, there are exceptions and special circumstances. In some disability claims, it may not be immediately apparent whether or not your attorney fees incurred in a Social Security Disability case are tax deductible. There are special circumstances where attorney fees may be deductible in Social Security Disability cases. It is important to understand how these special circumstances affect the deductibility of attorney fees in a Social Security Disability case.
One special circumstance that may impact your case is the filing of a judicial review for a denied claim. A judicial review is a formal procedure before the United States District Court where your attorney seeks to present the federal judge with information, witnesses, and evidence of your disability in order to obtain a favorable decision. The most common type of judicial review for an SSD case involves a hearing in front of a United States District Court judge. While these hearings occur infrequently, Social Security does allow individuals to request a judicial review of a denied claim. When a judicial review occurs, the judge can review the evidence in your case and make a decision on whether or not you qualify for Social Security Disability. If the judge finds that your case is in order, these administrative hearings allow you to prove that you are disabled and entitled to benefits. Dionisio v. Barnhart, 320 F.Supp.2d 224, 225 (D.Conn.2004).
Another special circumstance involves offsetting past-due benefits. If you have been awarded past-due benefits, a portion of that money – the money that represents non-taxable Social Security Disability benefits – can be sent directly to your attorney even if the amount is more than the allowed fee agreement percentage. This system, called an EAJA Offset, was originally intended to offset the fees of a prevailing party prior to the passage of certain amendments to the Social Security Act. Although Social Security has since promulgated regulations to implement the EAJA Offset, this allows any EAJA awards to offset attorney fees from past-due benefits. Cuca v. Barnhart, 459 F.Supp.2d 1137, 1153 (E.D.Cal.2006). This allows Social Security to withhold "the lesser of" $5,300.00 or 25% of past-due benefits to pay for attorney fees. Jones v. Barnhart, 382 F.Supp.2d 1118 (D.Colo.2005). At the time the EAJA Offset takes effect, an EAJA award can be ruled by an administrative law judge as not part of an EAJA Offset. Id.
PSD fees. A different fee structure for attorneys who are awarded federal work is called a PSD fee. 20 CFR § 404.1730(c)(1). Also, the Federal Tort Claims Act (FTCA) requires a different fee schedule for attorneys. 28 U.S.C. § 2674.
Tips for Claiming Deductions
Practical tips for claiming deductions for legal fees: The best tip is to be advised of this law in advance and keep a Section 132(h) claim form signed by the client to turn in with the other paper work for IRS. To prove the fees are directly connected to the disability case , do not go off on other matters unrelated to the disability case and get side tracked such as nose bleeds etc. Keep paper work and records of the disability case separate (do not have other miscellaneous baggage in the boxes and accounting records) and put the client’s name on the box. A log of telephone calls and dates should be printed out and kept with the records and the attorney should have a written billing record every time the case is worked on.
Hiring a Tax Expert
Many taxpayers are also unaware that when it comes to maximizing deductions and paying fewer taxes overall, the soundest approach possible is to speak directly with a tax adviser for guidance specifically on the subject at hand. When it comes to the tax ramifications of claiming legal fees paid for Social Security Disability payments, seeking advice from a tax consultant is crucial, as the ability to deduct those payments depends heavily on individual circumstance. A brief conversation with a tax professional related to particular previous returns and year-to-year changes may prove more beneficial than simply believing the conventional wisdom that appears in books or online and guessing what to do.
Simply put, a reputable and trustworthy tax professional helps optimally reduce tax obligations while simultaneously ensuring full compliance with current tax law. It is better to find a solution to a tax problem today than it is to find out a problem actually existed during an independent audit or examination.
Tax Law Updates
The 2017 Tax Cuts and Jobs Act (TCJA) added another layer to the tax issues facing taxpayers attempting to deduct their legal fees. Under TCJA, individuals are not permitted to deduct "miscellaneous itemized deductions" for tax years 2018 through 2025. Section 67(e) of the Internal Revenue Code defines what qualifies as a miscellaneous itemized deduction , and attorney fees are listed among those allowances. While this language has always been in the statute, as a result of the 2017 changes to tax law, no deduction will be available to an individual who pays his or her attorney a percentage of past-due Social Security Disability benefits. An exception exists for taxpayers whose attorney fees are contingent on collecting past-due fees but are paid directly to the attorney.