The issue in question is whether a fee paid by a defendant to a plaintiff’s attorney should be excluded from the plaintiff’s income or included but deductible. This only matters when a part of the award is taxable. If the fee is excluded, it doesn’t show up on the plaintiff’s tax return, but if it’s included, it can usually only be deducted if you itemize your deductions. Florida is one of the few states where taxpayers may get better tax treatment for these payments. The issue at stake is whether legal fees from winning a lawsuit should be included as income and then deducted, or if they should be excluded from income altogether. This affects how much tax a person has to pay on the money they receive from a lawsuit. Different parts of the country have different rules about this, and it has caused a split among the courts. The Supreme Court has declined to get involved, so it’s up to Congress to fix the problem. There’s a disagreement about whether lawyers should have to pay taxes on their fees from winning a case. It started with a question about state laws on fees, but now it’s about whether the money counts as the lawyer’s or the client’s income. Different courts have different opinions, and it’s hard to predict how it will be resolved. The government says that when a lawyer gets paid from a settlement or court judgment, it’s like the taxpayer got paid. But if a person has a contract where their lawyer only gets paid if they win, then the person doesn’t actually owe the lawyer anything. So it shouldn’t count as income for the person. Also, the person doesn’t have control over that money until the lawyer gets it, so it shouldn’t count as income for them. In some cases, decisions about whether income can be excluded from taxes are based on the wrong idea. The issue should be about whether the person ever had control over the part of any money they might get from a lawsuit that was meant for their lawyer. This is true even if the lawyer is fired. Most states allow lawyers to take a share of the money from a lawsuit as long as they have a fair agreement with the client. So, even if the client has some control over the lawsuit, they never had control over the part meant for the lawyer. Lawyers have been credited with turning potential claims into money through legal judgments. Some courts see this relationship between lawyers and clients as a partnership, while others see the lawyer as just an agent. Most courts treat fixed and contingent legal fees differently for tax purposes, but there is no good reason to do so. It can be assumed that Congress intends to treat all legal fees the same way for taxes. The main issue is about what money goes to the lawyer in cases where they only get paid if they win. In the past, the tax law has always seen the money from a lawsuit as belonging to the person who filed the lawsuit, not the lawyer. The lawyer is just hired to help get that money, and their payment is part of what the person gets. Right now, people in Florida can keep this money out of their taxes, but that might not last. The laws might change, and then everyone will have to follow the same rules. This article is about how lawyers’ fees are taxed and whether it’s fair. It talks about cases where people received money for physical injuries and didn’t have to pay taxes on it. But it also discusses cases where people had to pay taxes on their settlements, even though their lawyers took a big cut. Some courts have said this is unfair, but others have disagreed. The article also mentions a law in Florida that gives lawyers a right to part of their clients’ settlements. Some court cases have discussed whether giving a lawyer part of a legal claim in exchange for future services could be considered taxable income for the client. In one case, the government tried to argue this, but the time limit for them to make the claim had passed. Contingency fee agreements, where a lawyer only gets paid if the case is successful, are not allowed in certain criminal and marital cases in Florida. Merritt A. Gardner is a lawyer in Tampa who works for Gardner, Wilkes, Shaheen & Candelora. This column is written by the Tax Section, and they want to make sure lawyers do their job well and help the public.
Source: https://www.floridabar.org/the-florida-bar-journal/taxation-of-contingent-fees/
Leave a Reply