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#MeToo Plaintiffs Face Big Tax Woes

  • 5 February 2019
  • Author: Alexander Carr
  • Number of views: 304
  • 0 Comments
#MeToo Plaintiffs Face Big Tax Woes

It’s been nearly a year since we brought you news that most plaintiffs are now taxed on their entire personal settlement reward while their attorneys are still on the hook for income taxes on what they receive. At the time, we assumed the problem would be cleared up within months, but it’s still in full effect. Among the most shocking victims? Sexual harassment plaintiffs and their attorneys.

Since a pivotal ruling in 2005, plaintiffs are no longer able to deduct attorney fees before being taxed on settlement income. However, plaintiffs could skirt around the problem by deducting attorney fees as a miscellaneous itemized deduction instead. Fast forward to 2018 and avoiding the tax by itemizing is no longer possible.

For more background on this major tax hiccup, take a look at our previous coverage. What’s happened in the months since the new tax code was enacted highlights how tricky the rule can be for certain cases like those involving sexual harassment.

“Starting in 2018, if a sexual harassment settlement is confidential, the defendant cannot deduct legal fees or the settlement amount. However, it unintentionally seems to also prevent plaintiffs from being able to deduct their own legal fees,” Forbes Contributor Robert W. Woods points out.

It’s possible certain sexual harassment cases can be deemed tax free under the rule for compensatory damages for personal physical injuries but, as Woods explains, “many sexual harassment victims where there is little or no physical contact usually have to pay taxes on their recoveries…If you make claims for emotional distress, your damages are taxable. If you claim the defendant caused you to become physically sick, those damages can be tax-free. If emotional distress causes you to be physically sick, that is taxable. The order of events and how you describe them matters to the IRS.”

Attorneys: If you haven’t yet changed your strategies around sexual harassment litigation and other taxable settlements in light of this tax issue, it’s not too late. The amount your clients are taxed could directly affect both their net reward and the fees you recover, so it’s worth extra consideration. Feel free to contact us with questions.

Image Copyright: Elvira Koneva

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