When a party involved in a lawsuit makes a payment pursuant to a judgment or binding settlement agreement, the payment may be included in the recipient's income and may be deductible from the payor's income. A separate issue that also arises in litigation is whether either party may deduct the legal expenses incurred in the suit. The nature of the underlying claim is critical in determining the proper tax treatment of these payments and expenses. This report examines the tax consequences of these payments and expenses. It ends with a summary of the legislation proposed in the 109 th Congress that would affect these consequences. Portions of a payment may face different treatment depending on what each represents (e.g., replacement for lost wages, reimbursement of medical expenses, or punitive damages). H.R. H.R. 4707 (Simplified USA Tax Act of 2006) would return the law to how it was before SBJPA. The provision is included in S. 1565 (Tax Shelter and Tax Haven Reform Act of 2005) and the Senate-passed version of H.R. These are S. 1890 (Government Settlement Transparency Act of 2005) and the Senate-passed version of H.R. 4297 (Tax Relief Act of 2005). This provision has been introduced in S. 2020 (Tax Relief Act of 2005), the Senate-passed version of H.R. 3 (Safe, Accountable, Flexible, and Efficient Transportation Equity Act of 2005). H.R.
When a party involved in a lawsuit makes a payment pursuant to a judgment or settlement agreement, the payment may be included in the recipient's income and may be deductible from the payor's income. A separate issue that also arises in litigation is whether either party may deduct the legal expenses incurred in the suit. The nature of the underlying claim is critical in determining the proper tax treatment of these payment and expenses. Portions of a payment may face different treatment depending on what each represents (e.g., replacement for lost wages, reimbursement of medical expenses, punitive damages, fines or penalties, or attorneys' fees). This report addresses the tax consequences of these payments and expenses to the payment recipient and the payor. It ends with a summary of the bills that have been introduced in the 109th Congress that would affect these consequences: H.R. 3 (Safe, Accountable, Flexible, and Efficient Transportation Equity Act of 2005), H.R. 1985 (Federal Whistleblower Protection Tax Act of 2005), H.R. 2755 (Victims Tax Fairness Act of 2005), H.R. 3076 (Freedom from Unnecessary Litigation Act of 2005), H.R. 4297 (Tax Relief Act of 2005), H.R. 4707 (Simplified USA Tax Act of 2006), S. 1565 (Tax Shelter and Tax Haven Reform Act of 2005), S. 1890 (Government Settlement Transparency Act of 2005), and S. 2020 (Tax Relief Act of 2005).