A loophole that prevented victims of sexual harassment who receive settlements from companies or individuals that victimized them from deducting their legal fees on their taxes has been closed, according to Robert W. Wood, a tax expert and contributor to Forbes.
The so-called Weinstein tax law passed December 2017 prohibits individuals and companies that paid hush money settlements in sexual harassment cases from deducting those payments from their taxes. But it also prohibited those who received sexual harassment settlement payments from deducting their legal fees as well.
For example, if a person received a $500,000 settlement and her lawyer got 40 percent – or $200,000 – of that money, the plaintiff would have to pay taxes on the full $500,000 even though she only received $300,000.
Fortunately, the Internal Revenue Service announced it has closed this #MeToo loophole despite Congress’ inability to do so with its inaction on the “Repeal the Trump Tax on Victims of Sexual Harassment Act of 2018.”
“Recipients of settlements or payments related to sexual harassment or sexual abuse, whose settlement or payment is subject to a nondisclosure agreement, are not precluded by [the Weinstein tax] from deducting attorney’s fees related to the settlement or payment, if otherwise deductible,” the IRS stated on the FAQ of its webpage.
Despite the IRS fixing this issue, the taxation laws surrounding settlements is confusing and it would be in the best interest of anyone looking to engage in a settlement to get some tax advice before the agreement is documented, Wood says. Once it is signed, it’s too late to redo it.