psuzanne26
Junior Member
What is the name of your state? Georgia
In a sexual harassment case, if a settlement is received, do you have to pay taxes on it?
In a sexual harassment case, if a settlement is received, do you have to pay taxes on it?
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Taxes on a settlement?
- Thread starter psuzanne26
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tranquility
Senior Member
Not in the DC circut.
Everywhere else, maybe. It depends on what the composition of the settlement was.
Everywhere else, maybe. It depends on what the composition of the settlement was.
psuzanne26
Junior Member
$150,000 - Punitive Damages
$34,900 - 1 Year of Salary
In the state of Georgia...?
$34,900 - 1 Year of Salary
In the state of Georgia...?
tranquility
Senior Member
My question was imprecise. What are the specific torts sued on that the settlement was for?
Generally, punitive damages are taxable as are payments meant to be for lost wages. However, "sexual harassment" can be different. There is a recent change in the law regarding civil rights suits and the courts are all over the place. You will need to see a CPA or attorney to determine the taxability of the settlement.
You may not be taxed on parts. You may not have to report as income the attorney fees (contingency). However, the specific facts really matter and it would not be appropriate to put them out over the internet.
Generally, punitive damages are taxable as are payments meant to be for lost wages. However, "sexual harassment" can be different. There is a recent change in the law regarding civil rights suits and the courts are all over the place. You will need to see a CPA or attorney to determine the taxability of the settlement.
You may not be taxed on parts. You may not have to report as income the attorney fees (contingency). However, the specific facts really matter and it would not be appropriate to put them out over the internet.
What was the recent change regarding civil rights lawsuit awards? Are you referring to the deduction allowable for lawsuit costs? The Supreme Court settled the question of whether employment discrimination settlement awards were reportable and taxable for federal income tax purposes back in the late 1990's.tranquility said:There is a recent change in the law regarding civil rights suits and the courts are all over the place.
tranquility
Senior Member
Is "sexual harassment" an "employment discrimination lawsuit"? If you look at the OP's other thread, it seems like she is getting either an award or settlement from the EEOC. Is that the same issue as decided by the Supreme Court?
One change of the law is that you do not "deduct" for allowable lawsuit costs (not my choice of words, but it keeps us talking about the same thing) in civil rights lawsuits. You are now able to take the amount above the line, rather than taking it as a miscellaneous deduction.
If the OP came to me with the facts, I bet there would be a bit of time looking up case law before a good answer would be found.
One change of the law is that you do not "deduct" for allowable lawsuit costs (not my choice of words, but it keeps us talking about the same thing) in civil rights lawsuits. You are now able to take the amount above the line, rather than taking it as a miscellaneous deduction.
If the OP came to me with the facts, I bet there would be a bit of time looking up case law before a good answer would be found.
Yes, according to the information the OP provided, she filed a charge of employment discrimination against her employer with EEOC, alleging sexual harassment. The Supreme Court decision addressed whether awards stemming from employment discrimination lawsuits or out of court settlements were taxable.tranquility said:Is "sexual harassment" an "employment discrimination lawsuit"? If you look at the OP's other thread, it seems like she is getting either an award or settlement from the EEOC. Is that the same issue as decided by the Supreme Court?
The OP doesn't appear to be asking for reimbursement of expenses that would be deductible "above the line," such as attorney's fees or the cost of filing, witnesses, etc.
IRS has issued fairly specific guidance on the taxability of employment discrimination settlements.
tranquility
Senior Member
For a detailed synopsis of the current law and its need for further regulations/legislation, please see:
The Tax Treatment of Sexual Harassment Awards: Clarifying the Threshold for Exclusion, 30 J. Legis. 275 (2004). [William Volz and Vahe Tazian]
(And, if you are talking about the 1995 Supreme Court case, it created a two prong test--suit in nature of tort and physical injury when applying 104 to settlements.)
The Tax Treatment of Sexual Harassment Awards: Clarifying the Threshold for Exclusion, 30 J. Legis. 275 (2004). [William Volz and Vahe Tazian]
(And, if you are talking about the 1995 Supreme Court case, it created a two prong test--suit in nature of tort and physical injury when applying 104 to settlements.)
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The article to which you referenced provides the writers' opinion on the clarity of the IRS' guidance on payment for personal physical injury or physical sickness. However, as I understand the OP's inquiry, she's not asking about payment for personal physical injury or physical sickness, both of which are compensatory damages. She's asking whether an award, comprised of punitive damages and advanced salarly, is taxable.
IRS' guidance states that "interest, punitive damages, emotional distress or mental anguish, and employment discrimination or injury to reputation settlements are generally taxable." See http://www.irs.gov/pub/irs-pdf/p4345.pdf. You can go to IRC section 61 for more details.
IRS' guidance states that "interest, punitive damages, emotional distress or mental anguish, and employment discrimination or injury to reputation settlements are generally taxable." See http://www.irs.gov/pub/irs-pdf/p4345.pdf. You can go to IRC section 61 for more details.
She is in the 1th Circuit and the 11th Circuit has held that amounts associated with attorney's fees ARE fully taxable. As mm indicated all of that is taxable.tranquility said:My question was imprecise. What are the specific torts sued on that the settlement was for?
Generally, punitive damages are taxable as are payments meant to be for lost wages. However, "sexual harassment" can be different. There is a recent change in the law regarding civil rights suits and the courts are all over the place. You will need to see a CPA or attorney to determine the taxability of the settlement.
You may not be taxed on parts. You may not have to report as income the attorney fees (contingency). However, the specific facts really matter and it would not be appropriate to put them out over the internet.
tranquility
Senior Member
It's too bad those fellows wasted all their time on something already so settled. By the way, "generally" means there are exceptions. What are they? Can any of the OP's facts fit into those exceptions? What are *all* the facts? While I take what the OP stated as truth (See the answer I provided originally.), we should all acknowledge that she may not have been legally precise--which is why I had doubts.
IRC 61 defines gross income--agreed. However, I think the more relevant section is IRC 104. As I wrote originally, "Generally, punitive damages are taxable as are payments meant to be for lost wages." (Weird, it's almost like I knew the IRS postion without even looking at their guidance.)
As to the 11th circut, the Civil Rights Tax Relief Act was passed by the house and senate and placed in the American Jobs Creation Act. The law was passed in 2004. Part of that act (Section 703) regarding attorney's fees had that in any settlements made late in 2004 (I can't remember the date.) related to employment discrimination (broadly defined) or civil rights, there is an above-the-line deduction for attorney's fees.
It is unlikely the 11th circuit found the law unconstitutional. It is even more unlikely a case related to the act has reached the appellate level in such a short time. I'd bet we are not talking about the same thing. (Besides, I think the Supreme Court brought together the circuits on this issue and the treatment before settlements before late 2004 is the opposite of the way they are treated after that time.)
IRC 61 defines gross income--agreed. However, I think the more relevant section is IRC 104. As I wrote originally, "Generally, punitive damages are taxable as are payments meant to be for lost wages." (Weird, it's almost like I knew the IRS postion without even looking at their guidance.)
As to the 11th circut, the Civil Rights Tax Relief Act was passed by the house and senate and placed in the American Jobs Creation Act. The law was passed in 2004. Part of that act (Section 703) regarding attorney's fees had that in any settlements made late in 2004 (I can't remember the date.) related to employment discrimination (broadly defined) or civil rights, there is an above-the-line deduction for attorney's fees.
It is unlikely the 11th circuit found the law unconstitutional. It is even more unlikely a case related to the act has reached the appellate level in such a short time. I'd bet we are not talking about the same thing. (Besides, I think the Supreme Court brought together the circuits on this issue and the treatment before settlements before late 2004 is the opposite of the way they are treated after that time.)
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I can only offer an opinion based on the facts the OP presented and my own knowledge and experience. I don't see how the provisions of the Civil Rights Tax Relief Act apply to the OP's question. Ditto for the article addressing payments for physical injury or sickness. She hasn't asked her employer to pay any costs, attorney's fees or otherwise, associated with her charge and she isn't asking for any kind of compensatory damage, physical, emotional, out-of-pocket, etc.
I'll leave it up to IRS to decide the taxability question. If she does settle her harassment charge as described and her employer issues her a payment, the employer will treat the money as reportable income and include it on the W-2 it issues her and the 1099 it sends to SSA. If she doesn't report it on her income tax return, IRS will eventually become aware of the omission and so notify her. She can then engage in a debate with the IRS agents on whether the income is taxable.
Punitive damages are punishment for an employer's outrageous conduct that violates a law. They aren't considered lost wages, which are subject to FICA taxes. FICA taxes are not withheld from punitive damage awards.
I'll leave it up to IRS to decide the taxability question. If she does settle her harassment charge as described and her employer issues her a payment, the employer will treat the money as reportable income and include it on the W-2 it issues her and the 1099 it sends to SSA. If she doesn't report it on her income tax return, IRS will eventually become aware of the omission and so notify her. She can then engage in a debate with the IRS agents on whether the income is taxable.
Punitive damages are punishment for an employer's outrageous conduct that violates a law. They aren't considered lost wages, which are subject to FICA taxes. FICA taxes are not withheld from punitive damage awards.
No the 11th Circuit has not addressed that law...I'm just telling everyone that the 11th circuit has addressed the taxibility of attorney's fees in discrimination cases and found them taxable to the recipient of the award...T- this is not one of your constitutional fourth or fifth amendment posings...this is the IRS and they WILL get their money. No matter what it is ALWAYS better to assume that the IRS is entitled to its cut.tranquility said:It's too bad those fellows wasted all their time on something already so settled. By the way, "generally" means there are exceptions. What are they? Can any of the OP's facts fit into those exceptions? What are *all* the facts? While I take what the OP stated as truth (See the answer I provided originally.), we should all acknowledge that she may not have been legally precise--which is why I had doubts.
IRC 61 defines gross income--agreed. However, I think the more relevant section is IRC 104. As I wrote originally, "Generally, punitive damages are taxable as are payments meant to be for lost wages." (Weird, it's almost like I knew the IRS postion without even looking at their guidance.)
As to the 11th circut, the Civil Rights Tax Relief Act was passed by the house and senate and placed in the American Jobs Creation Act. The law was passed in 2004. Part of that act (Section 703) regarding attorney's fees had that in any settlements made late in 2004 (I can't remember the date.) related to employment discrimination (broadly defined) or civil rights, there is an above-the-line deduction for attorney's fees.
It is unlikely the 11th circuit found the law unconstitutional. It is even more unlikely a case related to the act has reached the appellate level in such a short time. I'd bet we are not talking about the same thing. (Besides, I think the Supreme Court brought together the circuits on this issue and the treatment before settlements before late 2004 is the opposite of the way they are treated after that time.)
tranquility
Senior Member
(weenor, I tried to send this privately, but your mailbox is full.)
The 4th and 5th amendments are my avocation, the IRS is my job. The treatment for *contingent* attorney fees in the 11th circut are the same as in the rest of the country. The Supreme Court put the issue to rest in Commissioner v. Banks, 543 U.S. 426 (2005) where it said contingent fees are taxable as income to the plaintiff. (Anticipatory assignment)
I was forced to research a bit as I didn't want to start talking about the 11th circuit out of my backside. Prior to Banks, I believe the 11th circut in Davis v. Commissioner, 210 F.3d 1346 (2000) determined contingent attorney fees are excludable from gross income for federal tax purposes. The reasoning was that state law in those jurisdictions give attorneys ownership rights to the settlement. The minority result is the same in the Fifth and Sixth circuits as well. While the specifics are different, they are included in gross income and deductible as a miscellaneous deduction in the other circuits.
However, in Banks, the Supremes talked about the 2004 Act and said:
Had the Act been in force for the transactions
now under review, these cases likely would not have arisen. The Act is not retroactive, however, so while it may cover future taxpayers in respondents_ position, it does not pertain here.
The 4th and 5th amendments are my avocation, the IRS is my job. The treatment for *contingent* attorney fees in the 11th circut are the same as in the rest of the country. The Supreme Court put the issue to rest in Commissioner v. Banks, 543 U.S. 426 (2005) where it said contingent fees are taxable as income to the plaintiff. (Anticipatory assignment)
I was forced to research a bit as I didn't want to start talking about the 11th circuit out of my backside. Prior to Banks, I believe the 11th circut in Davis v. Commissioner, 210 F.3d 1346 (2000) determined contingent attorney fees are excludable from gross income for federal tax purposes. The reasoning was that state law in those jurisdictions give attorneys ownership rights to the settlement. The minority result is the same in the Fifth and Sixth circuits as well. While the specifics are different, they are included in gross income and deductible as a miscellaneous deduction in the other circuits.
However, in Banks, the Supremes talked about the 2004 Act and said:
Had the Act been in force for the transactions
now under review, these cases likely would not have arisen. The Act is not retroactive, however, so while it may cover future taxpayers in respondents_ position, it does not pertain here.
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