On May 11, 2004, the Senate passed a bill (S. 1637) which included a provision of the Civil Rights Tax Relief Act (CRTRA) that would bar the double taxation of attorney’s fees in discrimination and other employment cases. The Senate bill will now be considered by the House.
In the Small Business Job Protection Act of 1996, which increased the minimum wage, Congress made all damage awards not based on “physical injuries or physical sickness” taxable. Therefore, unlike for awards in personal injury claims, which remain untaxed, awards for discrimination claims awards involving back wages, non-physical injuries (including emotional distress), and attorney’s fees are now taxable, regardless of how the injuries are designated in a settlement agreement. This discriminates against plaintiffs who bring civil rights cases.
Pursuant to Title VII, prevailing plaintiffs are entitled to “make whole” relief, which includes reimbursement of reasonable attorney’s fees and costs. Since 1996, civil rights case plaintiffs have been, and still are, taxed on the portion of the award paid to their attorney as attorney’s fees. Since attorneys are taxed on the attorney fee award as well as the plaintiff, the attorney’s fees award end up being taxed twice. The provision of the CRTRA recently passed by the Senate eliminates the taxation of attorney’s fee awards completely, by eliminating attorney’s fees from the plaintiff’s gross income.
Other provisions of the CRTRA not yet passed by the Senate include those that would eliminate taxation of emotional distress awards in discrimination cases, by excluding such damages completely from taxable gross income, and prevent workers subjected to illegal discrimination from paying higher taxes on lump-sum wage awards. The CRTRA would also provide for income averaging of back pay awards, which would permit back wage awards to be taxed over the number of years for which the award was designed to compensate. Currently, when plaintiffs receive back pay awards covering many years of wages the IRS regulations require that the back-pay awards (taxable income) be taxed in the year received even if the award covers more than one years’ wages. This can place workers in a higher tax bracket than they would have been in had they not been discriminated against and received their wages over the years they worked.
For further information on the CRTRA please see the National Employment Lawyer’s Association’s Action Center (http://capwiz.com/nela/home/).
