Originally Posted by
CollegeFlyer
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.
Effectively 35%
From wikepedia
For 2007, the AMT Exemption is not fully phased out until AMTI surpasses $415,000 for joint returns. Within the $150,000 to $415,000 range, the TMT
rates of 26% and 28% are effectively multiplied by 1.25, becoming 32.5% and 35%. The TMT rate for capital gains becomes 21.5% to 22% rather than 15%, because each dollar of capital gain causes 25 cents more of ordinary income to be taxed at 26% or 28%. These are the true marginal federal tax rates for most taxpayers owing AMT. These marginal rates for TMT exceed regular tax rates at the lower end of this income range. Therefore AMT liability (the excess of TMT over regular tax) typically increases as income increases above $150,000. Non-deductibility of state income tax under the TMT exacerbates this problem. Advice to accelerate income when you will be liable for AMT is therefore exactly backwards for most taxpayers.