When a Legal Recovery is Considered Taxable to the Client

HomeOther Settlement Planning TopicsWhen a Legal Recovery is Considered Taxable to the Client

Introduction:

As a plaintiff attorney, it is important to ensure that a client will get a fair amount out of their settlement award. Unfortunately, for taxable damages cases, clients have to pay taxes on the amount that they will receive and the attorney’s fee portion of the case. But there are tax planning strategies that can help clients double or triple the settlement amount they will receive after taxes.

Types of Taxable Damages

While personal physical injury settlements without punitive damages or post-judgment interest are not taxable, most other legal recoveries are subject to taxation. Common cases where clients must pay taxes include:

  • Employment and labor law cases (e.g., wrongful termination, harassment)
  • Defamation, libel, and privacy violations
  • Emotional distress without a physical injury
  • Fraud, negligence, and breach of contract cases
  • Interference with property or contract cases
  • Professional malpractice
  • Punitive damages and post-judgment interest are taxable, even in personal physical injury cases.

The Plaintiff Double Tax Trap

Due to a change in law in 2017, plaintiffs now have to pay taxes on both the settlement they receive and the attorney’s fee portion of the case. For example, in a $10 million settlement where the attorney’s fee is $4 million, the plaintiff would have to pay taxes on the full $10 million, even though they only receive $6 million. This creates a significant financial burden for plaintiffs, who might even consider dropping the lawsuit since the amount they could potentially receive would not be worth pursuing the litigation. 

Tax Planning Strategies to Reduce Tax Bills and Maximize Settlements

The good news is that tax planning strategies can significantly reduce the amount of tax a plaintiff has to pay, often doubling or even tripling the money they end up with after taxes. By working with an experienced settlement planner, plaintiffs can explore these strategies and save a considerable amount of money on their settlement.

Conclusion

If you’re a plaintiff attorney or a plaintiff with an upcoming taxable legal settlement, don’t let the Plaintiff Double Tax Trap take a significant portion of your recovery. Greg Maxwell, an attorney and Certified Financial Planner, specializes in helping plaintiffs and their attorneys navigate these complex financial matters. Contact Greg Maxwell today to explore tax planning strategies tailored to your case and ensure you maximize your settlement and minimize your tax burden.

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