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New US tax law - attorney's fees no longer deductible

Discussion in 'Finances, Work, and Disability' started by viggster, Nov 18, 2018.

  1. viggster

    viggster Senior Member

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    Hello - This year I reached a settlement with Prudential over my long-term disability policy. That is, they bought me out of the policy after a favorable court ruling. My attorneys, who took my case on contingency, were paid 1/3 of the settlement.

    Well I just got a nasty shock from my accountant. The new tax law - taking effect this year - eliminates the tax deduction for attorney's fees. That is, I have to pay taxes on the entire settlement, even the 1/3 that never touched my bank account and went straight to the lawyers. This is a big deal for anyone considering a settlement with the help of a lawyer. Please be aware of the new law. I may have eschewed a settlement and tried to force Prudential to pay the monthly benefit if I had been aware of the provision in the new tax law.
     
    Last edited by a moderator: Nov 19, 2018
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  2. Shoshana

    Shoshana Northern USA

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    Thanks for telling us about the law.
    Sorry that happened to you!
    :(
     
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  3. Forbin

    Forbin Senior Member

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    I'm not a lawyer, or an accountant, but could your lawsuit be considered related to personal injury / physical sickness? Settlements in such lawsuits seem to be tax free, even in 2018. Were that the case, the attorney's portion of the settlement would still not be deductible, but there would be no tax on that or any other portion of the settlement in the first place.
    It's not clear to me if this applies only to lawsuits related to the causation of personal injury/physical sickness, or if it applies more generally to lawsuits related to personal injury/physical sickness.

    The language below may be prior to 2018, but I'm including it because it seems to suggest that lawsuits relating to "personal injury" and "physical sickness" are treated similarly.


    This 2016 IRS document goes over this same ground. https://www.irs.gov/pub/irs-pdf/p4345.pdf

    This might be a long shot, depending upon the nature of your lawsuit, but I thought I would mention it.
     
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  4. Diwi9

    Diwi9 Administrator

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    @Forbin brings up some important points. Contact your attorneys and discuss this with them. It may come down to how your settlement documents characterize the basis of your award.
     
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  5. helios

    helios

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    wow, so does the IRS get 2 bites of the cherry then, you pay tax on the 1/3 you didn't get and the law firm pays tax on the 1/3 they got.
     
  6. viggster

    viggster Senior Member

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    No, long-term disability settlements are a different category than personal injury settlements. A personal injury settlement is when, e.g., a pedestrian gets hit by a car and the driver's insurance pays the injured party. Completely different situation.
     
  7. viggster

    viggster Senior Member

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    Yes, it's double taxation of the attorney's fees. One of many unintended consequences of a tax bill that got rammed through Congress without any hearings or any common sense.
     
  8. helios

    helios

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    I always think it is so wrong to rush thu legislation simply due to knee jerk reaction by politicians to a hot topic...ie legislation rushed thru as a result of 9/11 or some child dying due to a product malfunction that gets media coverage. In the US I read about unrelated amendments that get tacked on to bills/legislation at the last minute by certain senators. From what I have read of some of these they always seem to be dodgy and its left to the last minute so there is minimal public debate and in some of these cases I have read it seems obvious the senator is acting on behalf of some industry lobby they are getting funded by....but in this case its not some well funded corporate but the IRS.
    Why was it rammed thru? I would have thought the accountants/lawyers/wealth managers associations would have kicked up a stink about this in the media.
     
  9. viggster

    viggster Senior Member

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    Well this is getting off-topic but the tax bill was done without any hearings, and largely in secret.
     
  10. Silencio

    Silencio Senior Member

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    Eugh. Really awful that this happened to you @viggster..

    In past have paid about eighty thousand in attorney fees in 3 appeals. The deduction really helped make that less painful. This really screws people who are already getting screwed by the insurer.
     
    Last edited: Nov 22, 2018

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