What sexual-harassment victims should know about the new tax law
Sexual-harassment victims who sue and win monetary settlements could be forced to pay taxes on that money under the new tax law — even the part they need to pay their attorneys. Now two separate legislative proposals are trying to prevent that.
The new tax code, implemented late last year under the Tax Cut and Jobs Act, eliminated deductions employers could take for legal fees incurred by defendants’ sexual-harassment cases. But the language of this provision arguably eliminates the deduction for victims as well, which means their entire settlement would be taxed, including the money they subsequently give to attorneys.
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There has been a rise in sexual harassment cases, prompted in part by the #MeToo and #TimesUp movements, said Jeremy Heisler, an attorney at New York–based law firm Sanford Heisler Sharp. Both have illuminated the widespread harassment and discrimination women face in many industries.
Many sexual-harassment cases are argued on a contingency basis, where the lawyers are paid only in the event of a settlement. Take, for example, a victim who received a $100,000 settlement. About a third (or $33,000) would go to the attorneys on the case, Heisler said.
Depending on how the settlement is written, and how the new tax law is read, the victim would have to pay taxes on the entire $100,000, instead of the $66,000 she’s meant to keep.
The “Repeal the Trump Tax Hike on Victims of Sexual Harassment Act of 2018” bill, which was introduced in May and sponsored by Sen. Bob Menendez, a Democrat from New Jersey, aims to fix that language.
Given the political nature of the title, that bill may take extra time to pass, Heisler said. “The title of the act frankly seems to illicit Republican opposition,” he said. “The point of this exercise is to help sexual harassment victims, not to score political points.”
Other legislators take issue with the fact that sexual harassment victims are taxed at all. Earlier this month, Senators Kamala Harris, a Democrat from California, and Lisa Murkowski, a Republican from Arkansas, proposed another bill called “Ending the Monopoly of Power Over Workplace harassment through Education and Reporting Act” (also known as EMPOWER).
That bill attempts to change the way settlements are written, distributed and taxed. Right now, settlements are often paid out in a lump sum, which ends up being taxed more heavily than it would be if the money was distributed in installments, said Sunu Chandy, the legal director at Washington, D.C.–based nonprofit National Women’s Law Center.
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The bill argues that lump sum settlements should be considered nontaxable income entirely. “Even after going through the barriers and the hurdles, and winning or settling, you still end up with nothing — nearly not enough to have compensated you for what you’ve gone through,” Chandy said.
Federal cases also have a cap for how much a plaintiff can receive in compensatory damages, somewhere between $50,000 to $300,000 depending on the size of the company of the accused, Chandy said. Compensatory damages include emotional pain and suffering, inconvenience, loss of enjoyment of life and future financial losses. Those limitations were set in the Civil Rights Act of 1991.
In a case where the company defending the sexual harassment claim has between 14 and 101 employees, an accuser could see as much as $50,000, whereas a company with more than 500 employees would be required to settle for a maximum of $300,000. Under current tax law, claimants would still be taxed on this.
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Alessandra Malito is a personal finance reporter based in New York. You can follow her on Twitter @malito_ali.
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