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

viggster

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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.
 
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Forbin

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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.
03/12/2018

The new law should generally not impact qualified personal physical injury cases, where the entire recovery is tax free.

https://www.forbes.com/sites/robert...nts-legal-fees-cant-be-deducted/#7a91f7c70d71
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.

Compensation for Physical Injury is Not Taxable

As a general rule, the proceeds received from most personal injury claims are not taxable under either federal or state law. It does not matter whether you settled the case before or after filing a lawsuit in court. It doesn’t matter if you went to trial and won a verdict. Neither the federal government (the IRS), nor your state, can tax you on the settlement or verdict proceeds in most personal injury claims. Federal tax law, for one, excludes damages received as a result of personal physical injuries or physical sickness from a taxpayer’s gross income.

This means typical personal injury damages that are meant to compensate the claimant for things like lost wages, medical bills, emotional distress, pain and suffering, loss of consortium, and attorney fees are not taxable as long as they come from a personal injury or a physical sickness. A physical sickness means a claim for an illness. If, for example, you were negligently exposed to a germ that made you sick, any damages that you recover as a result of that illness would not be taxable.

https://www.nolo.com/legal-encyclopedia/is-your-personal-injury-settlement-taxable.html

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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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.
 

viggster

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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.
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.
 

viggster

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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.
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.
 
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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.
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.
 

viggster

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

Silencio

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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.
 
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Thanks for this information about this little known feature of the tax law passed in 2017. (Meanwhile, corporations saved something like $1.3 trillion in taxes over 10 years from that law that Republicans rammed through Congress.)

I am starting the process of filing an LTD claim and have spoken to six lawyers who specialize in disability insurance law and who have experience with ME/CFS cases. Three of them demand a 40% (!) contingency fee of any lump sum settlement if offered by an insurance company and accepted by me. They say this is fair payment for their work in taking on the big, bad LTD insurers. Some say a lump sum offer is usually how LTD insurers like to dispense with ME/CFS cases that are headed to a lawsuit or are already in court.

Some of these same lawyers basically demand that I undergo a 2-day CPET as a condition of representing me. They don’t care that the test could permanently worsen my health because they view it as providing incontrovertible proof of disability in ERISA and private disability cases. In other words, it makes it easy for them to reap that 40% contingency fee. Meanwhile, I am home bound and have a lot of problems walking more than a city block at this point without severe muscle fatigue and PEM, so a 2-day CPET seems brutal and dangerous to me.

I have had an iCPET by David Systrom, which shows severe dysfunction (severe cardiac preload failure and mitochondrial dysfunction), but these lawyers say they don’t understand his test and don’t want to use it as a piece of evidence in an LTD claim. Apparently, learning about the iCPET would be too much work.

Then I do the math: I live in New York, where my effective federal and state tax rate is nearly 50%. That means I would net only about 10% of the pre-tax disability benefit after the lawyer gets his 40% cut. Why bother filing if it puts my health at further risk, involves a lot of effort, and will leave me with a pittance? I guess the lesson is to avoid a lump sum offer. The other lesson is to negotiate lower contingency fees before signing any retainer agreement with a disability lawyer.
 

Silencio

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Hi @minimus,

Sorry to hear you are at the beginning of what is a long and arduous process. But on the bright side, it’s good that you have an LTD policy at all.

I strongly encourage you to appeal. Once you have paid the lawyers, the rest of your benefits are yours, potentially for years, or potentially they could even settle with you. This money is yours.

The 40% contingency fee is something you might end up paying several times, for each appeal. After your first appeal with them, you can negotiate them down to a lower rate. I got them to 33%.

My first appeal was with a cheap SSDI lawyer and cost me $2000. It was extremely stressful as I realized she did not know what she was doing. I elected afterwards to hire the 40% lawyers. Their level of service and experience was a whole different ballgame.

Legal appeals take a great deal of expertise. Mine was so well written, and the lawyer was a pitbull. She had relationships at the insurer for negotiations, and with the judges. She knew the doctors. She knew ERISA law backwards. That is what you are paying for. For me it was 100% worth paying a top lawyer. I would not have won otherwise and would be in a very difficult financial situation.

I did a CPET for my appeal. It rendered me permanently more disabled. I went from being able to cook for myself to not being able to as no longer can be upright that long. So, agree with you not doing it. I’m really surprised that they won’t take your icpet since it is an even more in-depth analysis. Have you spoken with Barbara Comerfords firm?

Did you pay toward your LTD premiums, eg to upgrade to get 60% coverage? If you paid towards the premiums, and your employer paid the rest, you are only taxed on the corresponding amount of benefit that they paid.
 
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@Silencio, I have not talked to Barbara Comerford, but I might give her a call. Thanks.

I have two LTD policies. One is a private policy I bought on my own in the mid-1990s. It has very few limitations or exclusions and, because I paid the premiums myself, any disability benefits would be tax free. The premium of my other policy, which is governed by ERISA, was paid for by my employer, so any benefit would be fully taxable.

As far as the iCPET goes, I have yet to find any lawyer who wants to use it in a claim. One lawyer explained that ERISA judges have cited the 2-day CPET in past decisions that reversed insurance company denials of ME/CFS claims (e.g. Brian Vastag's ruling). The iCPET has never been cited by a federal judge in a similar way. Also, the iCPET report is not geared toward describing whether I am disabled or not. It contains a ton of quantitative and qualitative information, but it does not say how that information correlates with my ability to work.

I have asked Betsy Keller at Ithaca College to look at my iCPET report and try to decipher from it whether it is sufficient to prove disability in an LTD claim. If not, I will have to decide whether to get the 2-day CPET. It seems that many people describe a permanent worsening of their health after the 2-day CPET, so I am really reluctant to attempt it.
 

gbells

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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.
They tried to do that to me when I obtained a student loan disability discharge. My $215k loan was discharged but I supposedly owed 30% tax on the entire amount which was counted as income, $64,500. Luckily I filed for indigency that year and was able to eliminate the debt. The entire system is rigged against us.
 

Silencio

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Hi @minimus. Yes, definitely call Comerford. I am interested to know what they would say regarding icpet. I would think they would ask Betsy to provide a written opinion on how she might interpret the data. I would hope that they could buttress it with other tests to prove disability and that they would give context to the icpet.

Cognitive testing is a big one — I had it done 3 times. For my first appeal I only had a positive tilt table test and cognitive testing. For my second, I had the cpet and updated cognitive testing. For the third, I had a doctor write a letter saying I was permanently sicker from the cpet and couldn’t do another, and I did more cognitive testing and a qEEG. In New York, cognitive testing is very expensive, $4500 with Dr. Gudrun Lange for an 8 hour test. Of course this is a lot to pay for in the event you don’t win. But, she is very good and known by the judges.

I think since you have 2 policies, you should figure out if it’s worth chasing down the ERISA one financially and from a stress management perspective. From what I understand, the non ERISA policies are much easier to win and you have more rights protected by courts. The ERISA one may also discount what they pay you based on other benefits you receive from the other plan and SSDI.
But then again, if you are doing legwork and tests for one, you might as well do it for the other?

Let us know what happens..
 
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Hi @Silencio. Yes, I will give Barbara Comerford's office a call. Did she represent you?

Thanks for the recommendation of Gudrun Lange. I have also heard Leo Shea is good for neuropsych testing, though he does a 2-day test (I guess to better demonstrate short-term memory loss) and charges $6,000 last I checked.

This whole process seems daunting and exhausting. I feel like I made a mistake in working full-time too long as my ME/CFS symptoms were worsening, and my health is now far worse than it was 15 months ago. I feel like I ended up in the "severe" end of the ME/CFS spectrum because I avoided any semblance of pacing.

So, I am wary of making the same mistake now. I really don't want to end up bed bound for the sake of a monthly check from an LTD insurer. Aside from being able to hire a home health aide, I wonder what I would do with the money.
 
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Silencio

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Hi, yes, they represented me.
I understand how daunting it is. It’s horrible to deal with. I had a lot of help. A family member took me to ithaca, and to other doctors appts. I think if you have help to pursue it, and don’t have to do the cpet, it is manageable. I personally needed the money, I knew this disease could be for life, amd didn’t want to be impoverished. I needed it for housing, bills etc. If you aren’t worried about those things right now, also consider that you don’t know what the future might bring.

However, yes, there are no guarantees you will be successful. I had a better outcome than viggster, as I never ended up in court, and i got to use the tax deduction. I also know one other person who fought using same attorneys, and got only a very nominal settlement. So, although I think it’s worthwhile, you may well decide it’s not.