Tax Benefit Granted To Wrongful Discrimination Plaintiffs

Originally published 11 November 2004

In the recently-enacted American Jobs Creation Act of 2004 (P.L.108-357), a new subsection was added to the Internal Revenue Code for the purpose of ensuring that plaintiffs who win awards or settlements in certain civil rights cases and other lawsuits do not pay income tax on the part of the recovery paid to attorneys.

The new legislation provides an "above-the-line" deduction (instead of a "miscellaneous deduction") for attorneys' fees and costs paid by a plaintiff in connection with any action involving a claim of unlawful discrimination, including age discrimination, certain claims against the Federal Government, or a private cause of action under the Medicare Secondary Payer statute. The effect of this provision is that plaintiffs involved in these claims will be able to offset the legal fees against the total recovery, and will be taxed only on the net recovery. Thereby avoiding the limitations otherwise imposed on miscellaneous itemized