by Michael L. Sheehan, Esq.

One of the recurring tax issues in employment discrimination cases has been the proper treatment of fees paid to the claimant’s attorney. Some courts have allowed the fees to be deducted from the amount included in the claimant’s income. Other courts have held that the full amount of the settlement is includible in income, with the claimant then taking an itemized deduction for the legal fees paid. Itemized deductions are subject to a 2 percent floor, must exceed the standard deduction to have any “value,” and are subject to reduction as income increases (as is often the case with a major settlement). Because of these limitations, settlements analyzed under the itemized approach frequently weren’t seen as “netting” enough to the claimant to be attractive. The recently enacted American Jobs Creation Act (the “Act”) resolves this question of proper treatment by allowing the fees to be deducted from gross income – a so-called “above the line” deduction. Consequently, claimants can be assured favorable treatment of the legal fees portion of the settlement, which should assist in the settlement process. The Act applies to contingent and non-contingent fees, but the deduction cannot exceed the amount of the award or settlement. The Act is applicable to costs paid after Oct. 22, 2004, for judgments or settlements occurring after that date.