Congress to Consider Civil Rights Tax Relief

Posted by marykeating on October 18, 2011 under Discrimination in employment, Pending legislation | Be the First to Comment

Every candidate talks about taxes, and how the tax code is full of loopholes. One area of tax unfairness involves taxation of employment discrimination damages.  An employee who complains of employment discrimination often has to wait a few years before the case is heard.  In the meantime, her damages have piled up.  If the employee obtains a settlement or an award at trial, it often includes (1) damages to compensate for several years of unpaid or underpaid compensation, and (2) non-economic damages, such as emotional distress.  Once the money is paid, the employee is taxed on the lump sum as though it were all earned as wages in a single year.  The tax bite is hefty.

The Civil Rights Tax Relief Act, introduced last week, is designed to make the tax treatment fairer in two ways.  One would treat emotional and physical injuries caused by the discrimination as not taxable.  This is how personal injury cases treat monetary compensation for pain and suffering.  There is no logical reason why money for an auto accident should be tax free while money for discrimination should be taxed.

The second prong would let the employee use income averaging to stretch out the payments that are intended to make up for lost compensation.  The employee would pay tax on the backpay and front pay, but all at the tax rate that would apply if the income were apportioned by year.  In other words, the employee is not immediately sent to the top tax bracket for the one year in which he received the payment meant to compensate for seven years of discrimination.

Interestingly, the bill enjoys the support of both employee advocates and business groups.  Settlements and sometimes awards are made with the tax consequences in mind.  If the tax consequences are eased, settlements will be easier to reach, and can be lower if the tax consequences are not so severe.

Tax reform for discrimination plaintiffs?

Posted by marykeating on July 10, 2009 under Pending legislation | Be the First to Comment

Employment lawyers have long been lobbying for relief from the tax penalties imposed on winning or settling plaintiffs.  There are several problems, that a new bill is intended to fix.  First of all, employees who get a back pay award to compensate for several years of discrimination receive it in one tax year, ordinarily, and therefore pay at a higher tax rate than if they had gotten the pay originally, or if they could average the compensatory amount over several years.  Second, any damages awarded for the emotional distress associated with sexual harassment or disability discrimination or any other type of non-wage compensation are taxable.  This is opposite of what happens in an accident case, where most or all of the award is tax-free.

The Civil Rights Tax Relief Act of 2009 (CRTRA) is now pending in both houses of Congress. The House bill, H.R. 3035 , and Senate bill, S. 1360 would allow both income averaging and the minimization of taxation on non-economic damages.  Although most employment legislation finds business and employees on opposite sides, these kinds of bills are usually supported by employers and employees alike, since they make it easier to settle cases.  For example, several years ago Congress passed an amendment to the tax code to eliminate the double taxation of discrimination awards.  Before the 2004 American Jobs Creation Act enactment, the tax law required an employee to report as income the entire award or settlement on his tax return, even though a part of the money had been paid to the lawyer.  (The lawyer, of course, paid taxes on the same money.)  Although there was a deduction for the fees, many people found themselves liable for the alternative minimum tax amount.  This law, too, was supported by business and civil rights organizations as a matter of fairness.