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Tax Relief Update: Lobby Days Lead to Significant Advances

On May 6 and 7, many WF site visitors participated in our “Virtual Lobby Days” to lobby Congress on the Civil Rights Tax Relief Act (House version/Senate version). Virtual Lobby Days were held in conjunction with Lobby Days which took place in Washington, DC on the same dates, when dozens of workers affected by unfair taxes and their lawyers lobbied their members of Congress, assisted by our sister organization, the National Employment Lawyers Association. I am very pleased to report that the organized and concerted lobbying effort has had a very significant impact. Last Thursday, the day after the targeted lobbying concluded, the Senate Finance Committee, in its markup of the bill, included a portion of the CRTRA in the tax package currently under consideration by the full Senate. (See Washington Post article.) For a summary of the bill, as it was marked up by the commitee, see Technical Explanation of Provisions (the CRTRA summary is at page 187 of the document).

The CRTRA provision included in the Senate tax relief package concerns the double taxation of attorneys fee awards. Most people must hire a lawyer to bring a discrimination lawsuit in order to succeed, and the law requires that the employer must pay the attorney’s fee if you are successful. However, the amount that goes to the attorney for working on the case is taxed twice. In most parts of the country, the IRS says that both the attorney and the employee owe taxes on the same amount of money, even though the employee never sees the money. In some cases, this means that employees who win their lawsuits are left owing all their award and more to the IRS–for winning their case!

The Senate Finance provision would allow plaintiffs incurring legal fees in discrimination cases to take an “above-the-line” deduction of the legal fees. This puts attorneys fees on the same footing as other business expenses that are fully deductible (dollar-for-dollar) from income, rather than subject to various limitations that “below-the-line” miscellaneous itemized deductions face, including the alternative minimum tax, the 2% floor, and phaseouts at higher income levels–all of which often mean that only a very small amount of attorneys fees is now deductible. For more information on this topic, see WF’s fair taxes page. This means to solving the attorneys fee problem was suggested earlier this year by the National Taxpayer Advocate. In the most recent semiannual report to Congress, the Advocate identified the elimination of taxes on legal fees in nonphysical personal injury cases as the office’s top legislative priority, and urged Congress to pass a law making an above-the-line deduction available to those incurring these fees.

This is the first time that any CRTRA provision has been in a bill that has passed through a Congressional tax-writing committee, and makes the provision subject to future negotiations between the Senate and House of Representatives. On Friday (5/8), the House passed its own tax relief package, H.R. 2, which did not contain the attorneys fee provision. (See HR 2 Bill Summary for further information.) The Senate is in the process of considering the package passed by Senate Finance; however, consideration was delayed slightly by a technical error that would have made the bill ultimately more difficult to pass. (See MSNBC article.)

There is still very much an uphill battle to get this measure passed. First, the full Senate must pass the tax legislation keeping this provision intact. Once this happens, the House and Senate will attempt to reconcile their differences in a conference committee, and there is considerable disagreement between the two houses of Congress as to this bill and to tax relief generally. (See Boston Globe article.) However, the provision’s presence in the Senate’s tax package dramatically increases the likelihood that the measure could pass this year, either in this round of tax cuts or subsequent attempts to pass provisions that ultimately are dropped from the large tax cut package.

For those who have cases pending, there is one aspect of the provision that is very important for you to know about. In the Senate version, the provision, if passed, would apply to awards received after the date of enactment. This means, that until it is more clear whether or not the measure will pass this year, you may wish to delay receipt of any award you would otherwise receive while the bill is pending, if at all possible. (You may wish to consult with your attorney immediately for further information.) Otherwise, any award containing attorneys fees that you receive before the bill becomes effective would be subject to being taxed, when receiving the award later could help you avoid paying taxes on the attorneys fees. We will continue to report new developments here and on our fair taxes page, as will NELA at its web site.

Another significant development that has occurred as a result of lobby days is a number of new bill cosponsors. During the week of May 5-9, 21 new House cosponsors and 7 Senate cosponsors were added to the bill. There may be even more cosponsors added as Congressional offices which were either visited or received letters during Lobby Days review the legislation. Increasing the number of cosponsors will provide important support for the CRTRA in the days ahead, so we will continue to work to obtain more cosponsors while tax relief measures are still under consideration by Congress.

If you haven’t yet written your letters to Congress, it’s more important than ever that you do so. To get started, please go to our site’s Fair Taxes page, where you’ll find all kinds of information about this issue, including the key talking points about the bill. From there, you can select one of our two action alerts: Stop Taxing Discrimination Awards Unfairly! (for those not currently involved in a civil rights lawsuit); or our second alert especially designed for Current Plaintiffs in Civil Rights Cases. From that point, you can either send a message to your members of Congress directly from our site via e-mail, or you can use the information listed there for your talking points when you phone Congressional offices.

Also, if you haven’t done so already, please also take the time to sign up for email alerts on the Civil Rights Tax Relief Act and other Workplace Fairness legislative efforts. Sign up here. You can also help us spread the word, and involve supportive friends and family members, by using our Tell-a-Friend feature.

Even if you’ve already sent a letter, it’s time to reinforce the importance of adding this measure to a tax package that is destined to be signed by the President if it moves through Congress. We’re closer than ever to restoring fairness in civil rights cases, so please act now!

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