Changes in the Taxability of Attorney’s Fees

Changes in the Taxability of Attorney’s Fees

Recent changes in the tax code have increased the taxability of some lawsuit settlements. As a result, recipients could end up paying taxes on the total amount of the settlement, even if their attorneys automatically are entitled to a percentage of the settlement off the top. Rather than paying taxes on the amount of the settlement after attorney’s fees are deducted, individuals will pay taxes on the full amount of the settlement.

Some lawsuits are not subject to these changes, such as qualified personal injury lawsuits, in which any recovery is tax-free; as a result, attorney’s fees are not deductible on your taxes. For other claims, such as most claims against employers, there is a built-in above the line deduction for legal expenses. The one exception is for proceeds from sexual harassment claims against employers in which the parties have signed a non-disclosure agreement. In this case, there is no provision for the deduction of legal fees.

For other types of lawsuits, however, the recipients of settlements will pay more taxes. Previously, individuals who were not entitled to an above the line deduction for their legal fees, such as in employment claims, still could deduct at least some of the legal fees as a below the line miscellaneous itemized deduction. Now, however, this deduction is not an option.

For example, in a long-term disability claim governed by ERISA, you may be able to recover damages. If you ultimately recover damages, however, then you will pay taxes on the full amount of damages, regardless of any amount or percentage of the award that is owed for attorney’s fees. Therefore, if you receive a total $100,000 settlement and 30% of that amount is payable to your attorney for legal fees, you will pay taxes on the full $100,000, not just the $70,000 that you receive following the payment of legal fees.

Long-term disability claims are complex matters that require intensive knowledge of ERISA laws and regulations. As a result, you will need experienced legal representation and advice to pursue an ERISA-governed disability claim. Bonnici Law Group is a law firm focusing on ERISA long-term disability benefits and bicycle injury cases in San Diego, CA. When you need effective legal representation, contact Bonnici Law Group at 619-259-5199 or email us at help@bonnicilawgroup.com.

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