Stop Taxing Discrimination Awards: The Civil Rights Tax Relief Act is Back

The news just in from Congress: the Civil Rights Tax Relief Act, one of the most important pieces of civil rights legislation pending before Congress in the last several years, has been reintroduced. (The bill numbers are HR 1155(House) and S 557 (Senate). You can continue to track the bills’ progress at the Thomas legislative site). You may wonder why this bill is so important, as tax issues don’t always tend to be the most interesting in the world, to say the least. Did you know, however, that everyone who succeeds in challenging discrimination by settling with their employer or winning in court now can face a second form of discrimination? That extra discrimination is caused by our tax code, which causes money received in the form of discrimination awards to be taxed at a higher rate than other kinds of court awards. Our tax code operates so unfairly that some employees who win their cases end up owing more money in taxes than they received for winning their cases! (See New York Times story of Cynthia Spina.)

This additional discrimination comes in three forms:

Taxation of Emotional Distress Awards: Awards received for “pain and suffering” or “emotional distress” are taxed in all cases where there has not been a physical injury. This discriminates against those involved in discrimination and civil rights cases. While emotional damages received because of an accident causing physical injury are tax free, damages to compensate for the very same psychological injury caused by employers who intended to discriminate, are not.

Higher Taxation of Back-Pay Awards: Awards received in discrimination cases that are designed to cover lost wages (back pay or front pay) are considered taxable income, just as if they had been earned on the job. However, IRS regulations require that all wages be taxed in the year received, even though many awards cover several years worth of wages. This can put workers in a higher tax bracket than would have applied if they had not been discriminated against and cause those who have been discriminated against to pay much higher taxes than those who never face job discrimination.

Double Taxation of Attorneys Fees: 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! New this year: the National Taxpayer Advocate has identified this particular problem at the top of the list of legislative priority items to be fixed in the Internal Revenue Code. For more on this issue, see Taxpayer Advocate Report. (The legislative section begins on page 156 of the report. It’s a PDF file, and I found the quickest way to get to the correct page is to go to the search function (the binocular button) and input “nonphysical personal injury.” The first time, it will take you to the table of contents (this is the first (and let’s presume most important) recommendation the Advocate makes), but if you do “find again,” you’ll end up where you need to be.)

The National Employment Lawyers Association, WF’s sister organization, has taken the lead in lobbying for the passage of this bill over the past several years. However, many groups with extremely diverse political and philosophical perspectives have also supported this bill, including the U.S. Chamber of Commerce, the American Small Business Alliance, the American Bar Association, the Leadership Conference for Civil Rights, and AARP. These groups understand that unfairly taxed settlements benefit no one but the IRS: businesses face higher settlement and litigation costs, while plaintiffs are not made whole for the harm that they have suffered even after undergoing litigation for that specific purpose. These groups have also succeeded in coming together for past lobby days, where affected plaintiffs travel to Washington to tell their stories. We expect that additional lobby days will be needed this year to make sure the bill passes in 2003. (Read about past lobby days.)

Even if you are not currently a civil rights plaintiff or attorney, we need you to speak out. As long as current tax law penalizes civil rights cases, some meritorious cases will not be brought, while others will cost both sides far more than they should. Don’t let this issue slip through the cracks…it may seem like a minor tax issue, but to those affected, it’s very serious indeed. And that person might someday be you.

Take Action Now:

Stop Taxing Discrimination Awards Unfairly!

Stop Taxing Discrimination Awards Unfairly! (current plaintiffs only)

More Information about the CRTRA:

NELA Civil Rights Tax Relief Page

Taxpayer Advocate Report

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Madeline Messa

Madeline Messa is a 3L at Syracuse University College of Law. She graduated from Penn State with a degree in journalism. With her legal research and writing for Workplace Fairness, she strives to equip people with the information they need to be their own best advocate.