The Maryland General Assembly passed the Civil Rights Tax Relief Act (HB1169/SB639). The law addresses the taxation disparity between personal injury and employment discrimination plaintiffs: emotional distress damage awards are taxable to the latter but not the former. The disparity encompasses a large number of federal laws relating to employment discrimination and retaliation, including Title VII, the Fair Labor Standards Act, and ERISA. Under the new law, noneconomic damages in employment cases will be a subtraction from income on Maryland tax returns.
Awards and settlements received by personal injury plaintiffs have long been excluded from income tax under federal law. One rationale is that an injured person has not “earned” income by suffering emotional or physical pain or disfigurement. Rather, though the victim can be compensated only by money, he or she did not voluntarily participate in the transaction, and would not have chosen to trade the miserable experience for cash.
Until 1996, employment discrimination victims did not pay tax on compensatory damages for emotional distress. Congress changed the law for employment discrimination and defamation awards, however, via the Small Business Job Protection Act of 1996. Maryland tax law automatically incorporated the taxability characterization of emotional distress damages in employment discrimination cases. Awards for emotional distress in personal injury suits remained free of taxation.
Employment rights advocates have been attempting to roll back this law on the federal level for some time. In the meantime, state by state, some victims are getting relief. Lawyers representing employers did not oppose the new law. They know that cases are easier to resolve if the plaintiff’s compensation is not eaten up by taxes. Damages attributable to punitive damages and lost wages are still taxable.
Assuming the Governor signs it, the law goes into effect as of July 1, 2013.