Personal injury attorneys have two main tax strategies they can use to maximize their legal fees and defer income taxes. The first method is to use the traditional qualified plans and tax planning strategies that CPAs discuss with all their clients. These include 401k plans, defined benefit plans, cash balance plans, IRAs, Roth IRAs, Section 179 deductions, etc. These are the typical income tax reduction strategies that are available to everyone.
Whether you’re a contingency fee-based attorney or not, you can take advantage of these common strategies. Many of these strategies play an important role in an overall tax planning approach.
Tax Strategies Exclusively Available to Contingency-Fee Based Attorneys
For contingency fee-based attorneys, there’s another category of tax planning options that are unique to them — meaning, no other professions, or even other attorneys, can take advantage of them. Contingency fee-based attorneys can defer legal fees using either a structured settlement annuity, similar to the option available to clients, or use an attorney deferred compensation plan.
These two approaches differ from 401ks and IRAs in that there’s no maximum contribution limit, no required minimum distributions, no employee participation requirements, no income phase outs, and more. Attorneys can defer as much as they want in any given year into either the structured settlement annuity option or the deferred compensation option, giving them a substantial benefit over the traditional method.
When to Choose Structured Settlement Annuity When Deferring Legal Fees
Structured settlement annuities offer guaranteed rates of return with the attorney deciding in advance the amount and the payment schedule of the annuity. This is a great option for attorneys who want a lifetime income stream or don’t want to risk market fluctuations.
When to Choose Deferred Compensation Plans When Deferring Legal Fees
On the other hand, deferred compensation plans shine in terms of market rates of return. Although the rates are not guaranteed, the funds within the deferred compensation plan are invested in a portfolio of the attorney’s choosing, allowing the attorney to earn market rates of return.
Deferred compensation plans also offer flexible timing. Attorneys don’t have to decide at the time of settlement when they want to receive the funds in the future. It allows for more flexible distribution amounts and payout dates.
In addtion, funding a deferred compensation plan does not require any involvement by the defense (unlike annuities where language has to be added in the release agreement and a qualified assignment document must be signed by the defense). The money also does not go offshore, unlike in some annuities where funds may be transferred to a Barbados or Ireland-based company before coming back onshore.
If you’re a contingency fee-based attorney and you are looking for more unique tax strategy options aside from the ones your CPA discusses with all of his or her clients, give us a call. There are great options exclusively available to you and other contingency fee-based attorneys. These options allow contingency fee-based attorneys to defer their legal fees and only pay taxes when funds from the annuity or deferred compensation plans are distributed.