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Tax question for lawyers

1368 Views 31 Replies 13 Participants Last post by  DNeurococo
I was told recently that someone won a $500,000 law suit. It was appealed and the final settlement was reduced to about $325,000.
The person paid the lawyer about $125,000. They were told by two tax attorneys that they had to pay taxes on the original $500,000 award AND had to pay taxes themselves on the amount the lawyer got too.

I assume this must be right if two tax attorneys agree. :eek:
I assume that the lawyer will get taxed on the amount they received also.
First, isn't that double taxing the legal fees?
Second, why would they have to pay taxes on an amount they nere received?

Please inform the weak of legal and tax minded!

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GB, I do not negotiate with blackmailers! ;)
I give my PC knowledge freely, if you want to withhold you legal advice for money, may you should go to Greedy White ;)

And yes, Rep could have found me! :D
gbrumb said:
Well not only is Bush *****in but so is life. Lets see what the Bass man has to say, first. :D
OK GB, you got the deal for the stated 48 hours! :rolleyes:
DN, if true that would prove that he charges for telling us what is already known! Thus furthering the stereo type of lawyers! :D
I'll take the chance! :D
Up date and a withdrawl of my offer! :D

Good morning Basset
Thanks for the info - I had already reviewed the IRS document.
Also took a peek at the techguy thread. DON'T CAVE !!!!!
First, you need to amend the statement of facts. Clearly the law is that Payee has to include the award in income - no question about that - it was for emotional distress - no physical injury.
The real question relates to the deductibility of the atty fees paid.
Under the interpretation given by the IRS, it is deductible as an itemized deduction subject to the 2% floor. (T tax attorney's, they understand what this means. The problem arises as a result of the Alternative Minimum Tax.
What happens is that the deduction for attorneys fees becomes taxable under the Alternative Minimum Tax - in essence, Payee is required to recompute her income by adding back certain deductions. One of the deductions she is required to add back are the itemized deductions that are subject to the 2% floor. In reality, this means thatthe tax code requires her to add back the attorneys fees, and to recompute the tax. The result is that, in the Payee's case, the actual tax liability more than doubles.
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GB, I didn't take your bet all that seriously, I didn't realize anyone else did either.
Thanks for the info! ;)
After closely reading what you posted GB.
After I talked to the attorney involved, it became more obvious what we were really talking about was whether the client had to pay the tax on the portion that the attorney got and not be able to deduct it. Not that they had to pay on the original settlement of $500,000 vs. the lower amt settled on.
At least that is how I understand it at present.
The suit involved an employer releasing medical information of their's to a newspaper.
Hehe and on Lan's work PC! :D
I will mangle the answer until someone who can explain it comes along. ;)
You calculate your tax with the deductions, then recalculate without certain deductions and the Alternative Minimum (I believe) is somewhere in between the two. :eek:
The attorney I talked to believed this would get changed eventually (if I read him right).
After talking to the attorney again tonight, he has informed me that state law tends to precede federal law (my words). Ergo what is fact in CA may not be so in MN or WI :(
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