Tax Consequences

Generally, all amounts you are able to recover from employment claims (other than through worker’s compensation and claims for physical injuries) are subject to state and federal income tax.

Since October 22, 2004, the amounts you pay for attorneys’ fees and costs in the year of recovery are fully deductible from your recovery.  Before then, depending on the circumstances of the case, attorneys’ fees and costs, if includable in your award or settlement, may have been only partially deductible.  This often resulted in the same money being taxed twice – once on the client, and once on the attorney.

The Civil Rights Tax Relief Act, effective October 22, 2004, permits an above-the-line deduction of attorneys’ fees and costs.  This means it is not subject to the Alternative Minimum Tax or the 2% floor on miscellaneous deductions.  The deductions can be taken whether you itemize other deductions.  (26 U.S.C. § 62(a)(ii)(20) and § 62(e).)

Each individual’s tax obligations are different.  Quest Law Firm does not specialize in taxes, so it will be up to you and your tax advisor to properly treat any recovery and attorneys’ fees for tax purposes.  You should keep in mind that tax considerations can still be very important to your net recovery and decisions along the way.