You may have heard that the Tax Cuts and Jobs Act, the one that gives corporations permanent tax cuts, was passed in a hurry. There was talk about members of congress writing provisions by hand during the wee hours of the morning. The bill was signed into law on December 22, 2017 and went into effect just a little over a week later. Now that the dust has settled, we can see at least one provision wasn’t thought out very well – Taxes for Sexual Harassment Settlements.
First, as part of the drafting process there was the Stop Tax Breaks For Sexual Misconduct Act. That bill said that businesses could not deduct from their taxes the payments that they made, including their lawyers’ fees, that were related to sexual misconduct. And the bill also made it clear that victims of sexual harassment receiving payments from a settlement or lawsuit could still exclude their attorneys’ fees from their gross income. Sounds great, right? But that bill was sent to committee where it still sits.
The well-meaning idea was to stop employers from benefiting from sexual harassment settlement payouts. The less benefit, perhaps the less likely the conduct. But then it looks like some different members of congress got hold of the idea, and they changed the language.
The new change to the tax code, included in Section 13307 of the new law, denies a tax deduction to businesses AND employees. Also the new law only applies to payments related to sexual harassment or sexual abuse IF the settlement agreement includes a nondisclosure agreement. (A nondisclosure agreement, also called a confidentiality clause or provision says the victim can’t say whether or how much she was paid.)
Again the intent is noble. Many of us who work in the field of sexual harassment suspect that employers don’t have much to fear where they can settle with the victim, make her stay quiet about it, and get a tax deduction to boot. So it makes sense to say to harassers or abusers, you can’t deduct these settlement payments or lawyers’ fees from your taxes. But why should the victim have to pay taxes on her attorneys’ fees, rather than excluding them from gross income?
Here’s how it works. Suppose a victim gets a $90,000 settlement in a sexual harassment case. Her attorney charges a one-third fee, or $30,000. Until this year, the victim could exclude that $30,000 attorney fee from her income, and didn’t have to pay taxes on it. But now, she can’t take that deduction.
It looks like Congress didn’t intend that victims should be punished, but here’s how it happened. The new law applies to Chapter 1, Subpart A, Title 26, which contains the entire internal revenue code. If the law had been written to just apply to the section of the code that deals with business deductions, there would have been no problem. But the new law, because it refers to “this Chapter,” applies to deductions for everyone, businesses and victims alike.
Since this seems like a technical error we hope that Congress will make a quick fix. But with the recent government shut down, how likely is it that a fix can be made quickly?
Even if members of both parties agree a fix is needed, will they treat sexual harassment victims the same way they’ve treated low income children needing re-authorization of CHIP, the childrens’ health plan? If Congress would put CHIP re-authorization up for a vote by itself, it would pass with a large majority. But that’s not getting done, since members are using the program as a bargaining chip for other bills they want passed.
Until this glitch in the law is fixed, please be sure you have a good sexual harassment lawyer who understands that the law has changed, and that taxes may need to be considered now in reaching confidential settlements.
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