On January 23, 2012, the Internal Revenue Service (IRS) issued a final regulation that reflects a 1996 law making payments for emotional distress damages taxable as income. The new regulation, cited as 26 CFR 1.104-1(c), makes clear that settlements and awards are taxable unless they are “attributable to a physical injury or physical sickness.” The regulation also restates an exclusion from income for those portions of emotional distress damages that do not exceed the amount actually paid for medical care.  So, if a whistleblower can show the amount actually paid for treatment of emotion distress, that portion of a settlement up to that amount can be excluded from income. The full text of the new regulation is available through this link, or in the continuation of this blog entry.

This new regulation emphasizes the need for the bipartisan Civil Rights Tax Relief Act (CRTRA), H.R. 3195, sponsored by Representatives John Lewis (D-GA) and James Sensenbrenner (R-WI), and S. 1781, sponsored by Senators Jeff Bingaman (D-NM) and Susan Collins (R-ME). The CRTRA will exclude all emotional distress damages from the calculation of taxable income, and will allow victims of discrimination and retaliation to use income averaging to avoid the elevated tax rate that can apply to receiving several years of backpay at one time. Advocates are currently working with the Joint Taxation Committee to compute the actual cost of these proposals.

Continue Reading New IRS regulation is no help to whistleblowers

Representatives John Lewis (D-GA) and James Sensenbrenner (R-WI) introduced the Civil Rights Tax Relief Act in 2009. This bill would provide that compensatory damages awarded in whistleblower and other cases would be excluded from the definition of “income” for income tax purposes, just as other personal injuries are excluded. The Civil Rights Tax Relief Act