In my article,Part II Analysis of Tax Consequences From Personal Injury Settlements, I explain the IRS code with regard to deducting attorney fees from personal injury settlements. Basically, the IRS will allow legal fees as deductions so long as the personal injury income is deemed taxable. This makes sense. The IRS will allow you to deduct attorney fees so long as it is directly related to the taxable income. Much like on a schedule C...if a business uses a professional or legal consultant which is directly related to the benefit of the business, it can be deducted. Conversely, it would not make much sense to deduct fees from income that is not "taxable" or included in gross income. Refer to my article linked above for more details on taking the deduction from a personal injury settlement.