What the Biden Tax Plan Means for Trial Lawyers
Every American has to think about taxes at least once a year. And for those of us who are business owners, have investments, own multiple properties, and so on, state and federal taxes are something we consider on the daily. This year is especially pivotal – like any year that marks a new presidency –because there’s also a new tax plan that will affect us all to some degree.
Trial lawyers: Pay close attention, as you and your practice could be particularly impacted by President Biden’s tax plan.
In his American Family Plan, Biden aims to include a large increase in the top marginal federal income tax rate on long-term capital gains and qualified dividends, jumping from 23.8 percent today to 39.6 percent for Americans earning above $1 million a year. For trial lawyers who are expecting large contingency fees, this news may raise some concerns. Without proper planning, their fees will come with an even greater tax burden.
So, what’s an attorney to do? A big contingency fee means there was a big win, which is always great news … but are trial lawyers S.O.L. when it comes time to pay Uncle Sam?
I’ll say it up front; they’re not out of luck. A tax planning tool exists that only contingency fee attorneys can use, and it’s a perfect match for this situation – which actually sounds pretty lucky to me.
Legally, trial lawyers only need to pay tax on the money they receive in one year. Before a case concludes, it’s possible for an attorney to set up a “some now, some later” arrangement with the incoming contingency fee. If some of that money is needed (or wanted) right now, a portion of the fee can hit the attorney’s bank account immediately. Then, the rest of the fee can be deferred into a periodic payment schedule that’s customized to fit his or her unique needs and financial goals.
The practice of deferring contingency fees has been around since 1996, when the 11th Circuit affirmed the 1994 Tax Court’s ruling in Childs v. Commissioner (103 T.C. 634). The Court ruled that attorneys involved in tort cases under contingency fee agreements have the unique opportunity to defer all or a portion of their fees. Fees included in the deferral arrangement are not taxed until the year(s) in which they are received – giving participating attorneys full control over how much income they receive in a year while helping them avoid a higher tax bracket and paying the IRS more for their hard-earned fees. In 2008, the IRS released Private Letter Ruling 150850-07, which provided guidance on the proper federal income tax treatment for certain periodic payments.
My settlement planning company, Milestone, specializes in structuring attorney fees backed by independently managed investment accounts. If you have any questions or concerns in how these new tax changes may impact you and your practice, give us a call.