The U.S. Senate and House of Representatives have re-introduced a bill to fix an illogical tax code glitch that has been penalizing consumers for years. The End Double Taxation of Successful Consumer Claims Act, S. 3459, H.R. 6699 introduced by Sen. Catherine Cortez Masto (NV) and Rep. Steven Horsford (NV-4) would amend the tax code to create a new above-the-line deduction to ensure consumers do not pay unjust taxes.
When consumers win or settle a claim in court, they are often able to recover their legal expenses under various state and federal laws such as the Fair Credit Reporting Act or Fair Debt Collection Practices Act. These recovered funds are not paid to the consumers, but to their attorneys who represented them.
Under current tax law, these recovered legal expenses are included in consumers’ taxable income even though they never actually receive the funds. The attorneys who do receive the funds already pay income taxes on them. This results in unfair double taxation as both a consumer and their attorney are expected to pay income taxes on the same set of funds.
Additional problems may arise when a consumer’s case is particularly drawn out or complex and they are awarded much larger amounts in legal expenses than they are in damages. In such situations, a consumer may even lose money despite winning a case because the tax burden from their recovered expenses is greater than their damages award.
However, under the new bill, consumers may see tax relief. The End Double Taxation of Successful Consumer Claims Act would create an above-the-line deduction for recovered legal expenses in all consumer cases. With the deduction, consumers would be able to rightfully exclude any legal fees they recover from their taxable income.
“After getting justice in court, people shouldn’t have to pay taxes on the money others make from their case. I believe our tax system should be fair and equitable. This legislation ensures that Nevadans and other Americans are made whole, and in the end, don’t pay more for an award granted by a jury or the courts,” said Rep. Horsford in a press release for the bill’s introduction.
“It’s past time we change outdated tax laws that are punishing consumers who take on big corporations after becoming victims of fraud,” said Sen. Cortez Masto.
In addition to ensuring consumers are not unfairly penalized, the bill would also bring the tax code back in line with the congressional intent behind major consumer protection laws. By authorizing consumers to recover their legal expenses, Congress intended for individuals to be able to stand up for themselves and enforce consumer protection laws. A tax code which punishes consumers for doing so has a chilling effect on harmed consumers bringing legitimate claims against bad actors.
Congress previously acted in 2004 to create a nearly identical above-the-line deduction for victims of discrimination. Consumers, much like discrimination victims, also deserve to be treated fairly by the tax system.
NACA applauds Sen. Cortez Masto and Rep. Horsford for standing up for the fair tax treatment of consumers and encourage the rest of Congress to follow suit.
