Originally Posted by
Mark_K
The fun begins when the attorney gets his 50% of the punitive damages, and the client finds out about AMT when trying to deduct it from the 100% he has to pay income taxes on.
But the punitive damages are a awarded to the plaintiff for injuries that she hasn't even suffered. She gets the money free, just to punish the defendant. So, even after the attorney takes 30-40% (it's
not going to be 50%, except in the most extreme <1% of cases), and the IRS takes its taxes (which, even under the AMT, would only be 28%), the plaintiff is still left with 30-40% of the money, completely free, no strings attached.
And clients frequently deduct the attorney's contingency fee when filing their taxes, and get away with it (as a result of IRS non-enforcement)--although the deduction is not actually allowed by law, and all these clients could be in for an audit if the IRS decides to start cracking down.
(And I say that the client gets punitive damages "completely free" because, when awarded, they are awarded in
addition to the actual damages suffered by the plaintiff. And actual damages are awarded tax-free, although the client still has to pay the attorney either his contingency percentage or his hourly fee.)
And...even if the IRS is getting a cut...it still doesn't follow (as was originally asserted by the other poster) that punitive damage statutes were designed to bribe bribe greedy
state legislatures.