You Sue & Win, but Pay More in Taxes Than $$ Received. Thanks New Tax Law
Published On: March 27, 2018
Can you Win a Law Suit and Then Need to Pay Taxes – Perhaps for More Than You Received?
I have been around for 50 years of elections, so am not to be overly surprised by lack of common sense from Congress and our President, but the latest revelation makes my stomach hurt.
With the new Tax Cuts and Jobs Act (TCJA) it is just coming to light that a person injured and later successful in suing must pay taxes on their entire recovery – including the attorney fees award.
I have to pay more in taxes than received from my lawsuit!!!
Scenario #1: You hire a lawyer to sue for the wrongful death of your spouse. That attorney does a terrible job (does not show up for court, fails to file necessary documents, etc.) After losing the wrongful death action (which everyone says should have been a slam dunk) you sue the attorney for malpractice. You are awarded $100,000; the attorney takes their fees $40,000 which leaves you with $60,000.
Result: You pay taxes on the entire award of $100,000, depending on your tax rate, it could be $30,000. Minus your attorney fees of $40,000, which leaves you with $30,000. Your attorney also pays taxes on $40,000 fees.
How was it before the 2018 tax law?
You pay taxes on $60,000 left after your attorney is paid, probably around $18,000 (again depending on your tax rate) leaving you with $42,000. Your attorney pays taxes on $40,000.
There can also be a situation where you pay more in attorney fees and taxes than you actually receive.
Scenario 2: Your neighbor or employer makes your life a living nightmare. You sue and after years of litigation you receive an award of $5,000, plus $45,000 in attorney fees.
Result: you pay taxes on $50,000 of about $12,500 (assuming you can use the 25% rate), BUT YOU ONLY RECEIVED $5,000. Your attorney pays taxes on $45,000.
Why this insanity?
Because the new tax law removed the miscellaneous itemized deduction category on tax returns, which is where you normally deduct payments to professionals such as an attorney.
By Diane Drain|Published On: March 27th, 2018|Last Updated: October 17th, 2022|
Diane is a well respected Arizona bankruptcy and foreclosure attorney. As a retired law professor, she believes in offering everyone, not just her clients, advice about bankruptcy and Arizona foreclosure laws. Diane is also a mentor to hundreds of Arizona attorneys.
*Important Note from Diane: Everything on this web site is offered for educational purposes only and not intended to provide legal advice, nor create an attorney client relationship between you, me, or the author of any article. Information in this web site should not be used as a substitute for competent legal advice from an attorney familiar with your personal circumstances and licensed to practice law in your state. Make sure to check out their reviews.*
5 / 5
“You folks are the BEST OF THE BEST in Arizona.” M.H.
You and Jay are the best attorneys I have ever had or needed and thank God for the Honorable Robert Gottsfield in recommending you folks – I would have never made it through the entire process without you and Jay and God Bless you both always and stay in touch as well. You folks are the BEST OF THE BEST in Arizona.
5 / 5
“My only regret is that I didn’t find Diane sooner.” K.H.
I can’t say enough good things about Diane. The way she handled my not typical circumstances was amazing. I was very nervous to start the bankruptcy process but Diane just has a very comforting way of explaining the whole process. My only regret is that I didn’t find Diane sooner. If you find yourself in a financial situation that you can’t correct on your own, please Call Diane Drain as soon as possible.
5 / 5
“Filing for bankruptcy can be a stressful life event” R.A.
Filing for bankruptcy can be a stressful life event, and selecting the right attorney can add to this stress. Diane and Jay were a pleasure to work with, and it is obvious that they are passionate about helping people get their life back on track. I would highly recommend them if you need a bankruptcy attorney.
Want to avoid dishonest debt collectors? Watch this video from FTC’s Consumer Advice By Joseph Ferrari,July 22, 2022 (reprint from FTC, Consumer Alerts) During Military Consumer Month 2022, the FTC [...]
Diane Drain received the 2022 Preeminent Award and Gold Client Champion Award from Martindale-Hubbell. The 2022 AV Preeminent award is given to an "elite group of attorneys who have been rated highly by their peers [...]
ARIZONA IS ONE OF 2 STATES THAT WILL TAKE YOUR TAX REFUND IF THIS HAPPENS. SHOULD THE LAW CHANGE? By RUSS WILES, Arizona Republic (reprinted for educational purposes only) Tens of millions of Americans [...]
My intention is to put you back in control of your life
Start with $0 down*. We provide affordable payment plans.
We are a debt relief agency; we help individuals and small businesses through the bankruptcy process. Attorney Advertising. This website is designed for general information only. Any information you obtain from this website should not be construed as legal advice, nor as grounds for forming an attorney-client relationship. You should consult an attorney for information on obtaining formal legal advice.