by Structured Settlement Watchdog®
The sequel to the "HIPAA Release scare" is Settlement Professionals latest "blog scare" entry on January 11, 2008 warns of a "perfect storm" of tax hell for victims of wrongful termination
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Here's what THEY SAY:
"The Supreme Court decision in the Banks & Banaitis v. Commissioner cases held that “as a general rule, when a litigant’s recovery constitutes income, the litigant’s income includes the portion of the recovery paid to the attorney as a contingent fee.”
What this means to you as a plaintiff receiving a taxable damage settlement is that you must report the gross amount of the settlement as income, and then deduct the attorney’s fee “below the line.”
This often subjects you to the 2% floor on itemized deductions, and will likely phase-out your allowable deductions and can even trigger the Alternative Minimum Tax (AMT): a “perfect storm” of a tax nightmare." (Meligan's characteristic yellow hi-lite left in for emphasis)
The reality is...
On October 22, 2004, President George W. Bush signed into law a sweeping piece of legislation entitled the American Jobs Creation Act of 2004 (the “Act”), that was intended to make it easier and less expensive to settle employment discrimination suits.
Section 703 of the Act modified section 62 of the Internal Revenue Code to provide an “above-the-line” deduction for attorney fees and court costs paid by or on behalf of a taxpayer “in connection with any action involving a claim of unlawful discrimination.” In other words, after the effective date attorney fees in discrimination suits were no longer included in a plaintiff’s gross income. While settlement amounts must still must be reported as income, as a result of the Act plaintiffs receive an offsetting dollar for dollar federal tax deduction for any attorneys’ fees or court costs paid in resolving discrimination suits. The deduction only applies to such fees and costs for any settlement or judgment occurring after October 22, 2004 and cannot exceed the taxpayer’s gross income for that taxable year.
Prior to October 22, 2004, a successful plaintiff in a discrimination case could not subtract the cost of attorneys’ fees and court costs from his or her gross income, but instead had to deduct such costs as a miscellaneous “below-the-line” itemized deduction. Itemized deductions are subtracted after gross income is adjusted and are subject to an alternative minimum tax or a two-percent floor. Consequently, prior to the Act, this tax treatment was often an obstacle to settlement negotiations, causing plaintiffs to seek higher settlement amounts to offset income tax consequences. From the employer’s perspective, the Act simplified settlement negotiations and made settlements less costly because the parties no longer have to consider the plaintiff’s tax consequences for attorneys’ fees and court costs paid as part of the judgment or settlement.
The deduction granted under the Act can be used for claims that are brought under:
- Title VII of the Civil Rights Act of 1964;
- National Labor Relations Act;
- Fair Labor Standards Act;
- Age Discrimination in Employment Act of 1967;
- ERISA;
- Employee Polygraph Protection Act of 1988;
- Worker Adjustment and Retaining Notification Act;
- Family Medical Leave Act;
- Americans with Disabilities Act of 1990;
- any federal whistleblower law; and
- any federal, state, or local law, or common law claims for the “enforcement of civil rights” or “regulating any aspect of the employment relationship.”
Wikipedia has a nice write up on the Commissioner v Banks and Baniatis, the case which Settlement Professionals, Inc. (SPI) Professionals, Inc. cites in its latest "blog scare". Quoting from Wikipedia "Employment cases are an exception to this Supreme Court ruling because of the Civil Rights Tax relief and the American Jobs Creation Act of 2004.
With respect to the so-called "perfect storm", is it Settlement Professionals that is "lost at sea"?
Great wave action with my rubber duck
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