Thompson & McCarty, P.C. CPA

A lawyer has to claim as income any settlements that he recieves. If he is not incorporated, or working for someone else, he even has to pay self employment on these settlements. A law passed last year allowed some taxpayers to take legal fees as an above the line tax deduction for attorney fees associated with a settlement. This is positively the correct way for the U.S. Income Tax code to be administered. One person has to report income so the person that paid the income receives a deduction for the expense. However, defamation, false imprisonment and emotional distress settlements are not covered by the new law. This means that an individual is having to pay taxes on money that he never receives. The attorney fees are often paid directly to an attorney. But the 1099 reports the settlement as though the "Winner" of the legal action receives the money. Even if the winner of a settlement has the opportunity to itemize the deduction, it is subject to a 2% of AGI limitation and the itemized deductions will probably trigger alternative minimum tax (AMT). This is unacceptable. It will not change unless we the citizens raise our voice and let the politicians hear that we are not going to stand for this type of double taxation.

What would happen if they told the Attorney that he could not take the expenses he incurred while representing the client in the case? The legal profession and its paid lobby would rightfully object very loudly and they would be heard and they would prevail. Our government is supposed to protect us when we are unable to protect ourselves. Instead, it has found a way to profit from bad law that is a burden on our society in the first place. It would seem that the powers that be on the Hill saw that there was no public back lash from bad law and proceedure so why not make it a profit center too. This is one of the biggest areas of bad tax code that exsist. Contact your Congressman and Representative today and let them know that this is not acceptable.