Employment lawyers have long been lobbying for relief from the tax penalties imposed on winning or settling plaintiffs. There are several problems, that a new bill is intended to fix. First of all, employees who get a back pay award to compensate for several years of discrimination receive it in one tax year, ordinarily, and therefore pay at a higher tax rate than if they had gotten the pay originally, or if they could average the compensatory amount over several years. Second, any damages awarded for the emotional distress associated with sexual harassment or disability discrimination or any other type of non-wage compensation are taxable. This is opposite of what happens in an accident case, where most or all of the award is tax-free.
The Civil Rights Tax Relief Act of 2009 (CRTRA) is now pending in both houses of Congress. The House bill, H.R. 3035 , and Senate bill, S. 1360 would allow both income averaging and the minimization of taxation on non-economic damages. Although most employment legislation finds business and employees on opposite sides, these kinds of bills are usually supported by employers and employees alike, since they make it easier to settle cases. For example, several years ago Congress passed an amendment to the tax code to eliminate the double taxation of discrimination awards. Before the 2004 American Jobs Creation Act enactment, the tax law required an employee to report as income the entire award or settlement on his tax return, even though a part of the money had been paid to the lawyer. (The lawyer, of course, paid taxes on the same money.) Although there was a deduction for the fees, many people found themselves liable for the alternative minimum tax amount. This law, too, was supported by business and civil rights organizations as a matter of fairness.