“The hardest thing in the world to understand is the Income Tax”
– Albert Einstein
If Einstein had difficulty understanding income tax, imagine how a claimant feels after having to pay tax on their attorney’s fees, of which they would never see a penny!
The Tax Cut and Jobs Act of 2017 is bringing us back in time to when attorney fees were required to be included in the taxpayer’s gross income. How many remember the Cynthia Spina case in Chicago? She was the Forest Preserve Officer who was awarded $300K in damages for the sexual harassment settlement she received while at work. But her attorney fees and costs came to nearly $1 million. When the IRS insisted that her fees and costs were also taxable income, she ended up losing the entire award, plus she received an additional tax bill of almost $100K!
Fast forward to today, we are faced with an eerily similar situation as attorney fees are again being included in the tax payer’s gross income. So why is this just now rearing its ugly head? Claimants who settled their cases in 2018, and now filing income tax returns, are starting to recognize they may have a tax problem.
This recent Forbes article further describes how a man’s $80M verdict after getting cancer from prolonged exposure to Roundup weed killer would be reduced to $2.5M after taxes. $2.5 million isn’t pocket change, but it’s still a shocking reduction.
Since Plaintiff attorneys have a fiduciary responsibility to their client, offering a non-qualified structured settlement is important. Deferring payments as opposed to taking a lump sum may not only help mitigate a potential tax liability, but it could also help prevent an E&O claim against the attorney.
By Dennis Drexler, Director of Business Development for Arcadia Settlements Group