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IRS Whistleblower award legal fee exclusion from income on California 540

Forum|Forum|1 year ago
February 16, 2025
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Everything calculated correctly on form 1040, but California 540 added the legal fees back as income on Form 540 as an adjustment. Is this right? Thanks in advance for help with this.

Best answer by MonikaK1

California still does not follow Federal law on this issue. Because California still allows miscellaneous itemized deductions, the fees are still deducted on Schedule A for California and not as a deduction from gross income.

A bill, California SB 1377, was introduced in 2022 to change the treatment to conform with the Federal return, but the bill ultimately did not pass.

How were the fees entered on your Federal return? Did you make any adjustments on the California return?

M

MonikaK1Answer

California still does not follow Federal law on this issue. Because California still allows miscellaneous itemized deductions, the fees are still deducted on Schedule A for California and not as a deduction from gross income.

A bill, California SB 1377, was introduced in 2022 to change the treatment to conform with the Federal return, but the bill ultimately did not pass.

How were the fees entered on your Federal return? Did you make any adjustments on the California return?

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MonikaK1

California conforms to the definition of Adjusted Gross Income under IRC section 62, but does not conform to IRC section 62(a)(21) relating to awards to whistleblowers. As a result, California does not conform to the federal change that expands the deduction for attorney’s fee related to awards to whistleblowers. This is why TurboTax moved the deduction from gross income on your Federal return to miscellaneous itemized deductions.

Thanks for the update confirming where you made your entry in the Federal return and where TurboTax made the change for California.

This California FTB webpage contains a summary of all Federal law changes from 2018 and where California law deviates from Federal. This webpage has links to more information about California nonconformity.

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MonikaK1

Please confirm the bottom-line is that TurboTax entered it correctly on the form 540 as I described? I just want to make sure I didn't miss something in your explanation. Thank you again.

Yes, if you entered the legal fees for a whistleblower case on 1040 Schedule1, line 24i on your Federal return, and TurboTax moved the fees to miscellaneous itemized deductions on your California return, Schedule A, that is the correct treatment under current law.

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