Plaintiff Double Tax Is Here To Stay
When a plaintiff receives taxable proceeds from a verdict or settlement, they’ re taxable on 100 % of it. That’ s true even when the plaintiff keeps only 60 % after subtracting 40 % for their lawyer’ s contingent fee. Of course, their lawyer still pays tax on that amount. Thus, the fee portion is taxed twice.
The double tax hits plaintiffs bringing many types of claims, including those for emotional distress in the absence of physical injuries, bad faith denials of insurance coverage, and defamation. It also hits plaintiffs in many sexual abuse cases and other physical injury cases with taxable proceeds, including punitive damages and post-judgment interest.
Legal fees have long been deductible under the miscellaneous itemized deduction rules. However, the TCJA eliminated the miscellaneous itemized deduction for tax years 2018 through 2025. That created the“ plaintiff double tax.”
Many hoped that the TCJA’ s elimination of the deduction would expire on December 31, 2025, when most of the TCJA’ s tax changes were scheduled to sunset. However, the BBB permanently eliminated this deduction. Legal fee deductions are still available in limited settings, including in cases of“ unlawful discrimination.”
BBB Made The TCJA’ s Lower Tax Rates Permanent
The TCJA reduced individual tax rates at nearly all levels of taxable income, with the most significant benefits accruing to those at higher income levels. If the TCJA’ s reduced tax rates had expired on December 31, 2025, the top three income brackets would have paid federal income tax rates of 33 %, 35 %, and 39.6 %, respectively.
The BBB made the TCJA’ s reduced tax rates permanent. Thus, the top tax rate will remain at 37 %.
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