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Are compensatory damages taxable/ FHA complaint?

Discussion in 'Other Residential Landlord & Tenant Issues' started by legaled, Aug 27, 2020.

  1. legaled

    legaled Law Topic Starter New Member

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    Jurisdiction:
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    Hello. Not sure exactly where to post this, but since it has to do with an FHA complaint about disability discrimination in a rental, thought I would start here.

    I am going to get monetary compensation for an FHA complaint filed. Most of it is for the difference between the rent I already paid to the facility I was living in and the lesser rent I would have been paying had the new place allowed me to move in. The other part is compensation for my time put into the complaint. The complaint had to do with disability discrimination.

    Will either or both of these parts of the compensation be taxable (federally, as we do not have an income tax in WA)? It has not been awarded yet, as we are ironing out the final conciliation. If taxable, is there wording I should use so that I don't have to be liable for the taxes -- like "$4000 compensation net of taxes"?

    Thank you.
     
  2. PayrollHRGuy

    PayrollHRGuy Well-Known Member

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  3. Tax Counsel

    Tax Counsel Well-Known Member

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    Two points. First, if you went to court on the Fair Housing Act (FHA) complaint the court would not award you any compensation for the time you spent on either the administrative complaint you filed with the Department of Housing and Urban Development (HUD) or the time you spent litigating the case in court. The time you spend yourself on this stuff is not part of your compensable damages nor allowed to you as a cost of litigation. If you paid a lawyer represent you, on the other hand, you may be entitled to reimbursement of at least some of the legal fees that you paid if you were successful in winning a judgment against the landlord.

    Second, as to the tax issue, an award you receive for an illegal discrimination claim is indeed taxable income to you. And should you get either attorneys fees paid or somehow get compensation for your time in preparing the complaint (which, as I say, you'd not get in court) that too is taxable income. You can't avoid inclusion of the settlement or award in income.

    You can try negotiating for a settlement in which the amount you get will be what you want after you pay taxes on it, but I think the landlord is unlikely to agree to pay more than what he/she would otherwise have to pay just to cover your taxes.

    Let me give you an example. If the amount after tax that you wanted was $4,000 and your marginal tax rate is, say, 25% (just picking a number to make the math easy) then the formula you'd use is:

    $4,000/(1 - .25) = $5,333.33

    Thus, you'd need to get a settlement of $5,333.33 from the landlord. Then when you include that $5,333.33 in income on your tax return, the income tax on that at a tax rate of $25% would be $1,333.33, leaving you after tax $4,000. But again, if your provable damages are only $4,000, the landlord is not likely to agree to pay the extra $1,333.33 just to cover your taxes.
     
    Zigner and PayrollHRGuy like this.
  4. legaled

    legaled Law Topic Starter New Member

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    Thank you for your response.

    The respondent has agreed to pay me the $4000, but we are still working out wording. I did not use an attorney, or appear in court. It is being worked through the HUD system.

    They agreed to pay me $1000 for my time. The remaining $3000 is for the $500/month more in rent I paid to my then landlord for 6 months while I was trying to work out something with the respondent. Had I been allowed to rent an apartment at the respondent's building, it would have saved me $500 a month, which I had to pay to stay in my place at the time as there were only higher rent options except for the respondent's place.

    I understand about the income (my time) part being taxable, but is the rent difference taxable since it is a reimbursement of a higher amount I had to pay while trying to work out something with the respondent and not getting anywhere (and then filed the complaint)? Again, they have agreed to pay it; I am just asking about the taxes, if any. Basically, are reimbursements taxable?

    Thank you, and thank you for the wording re taxes.
     
  5. Tax Counsel

    Tax Counsel Well-Known Member

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    Yes, it's taxable income. It is a settlement for a claim of illegal discrimination against you. Your damages in this case are the $3,000 in extra rent you had to pay. Damages received in a legal claim are taxable income unless some provision of the Internal Revenue Code (IRC) exempts it. As the U.S. Tax Court noted in a case in which a taxpayer obtained a settlement of a claim against a city for FHA and other violations relating to age restrictions placed on their home:

    It is well established that, pursuant to section 61(a), gross income includes all income from whatever source derived unless otherwise excluded by the Internal Revenue Code.

    Gibson v. Comm'r, 94 T.C.M. (CCH) 164 (T.C. 2007). The taxpayer in Gibson argued unsuccessfully that the award was not taxable based on the exemption in IRC § 104 for awards to compensate for physical injury. The Court rejected that effort as the taxpayer had not shown any physical injury as a result of the age discrimination and related acts by the city. As there was no other exception that would exclude this from income, the Court upheld the IRS determination that the settlement was taxable income.

    Characterizing as a reimbursement would not help you either since, generally, a reimbursement of money you paid to someone else is also taxable income, again unless some provision of the IRC says otherwise.

    For example, consider the case of an employer reimbursing an employee for travel expenses the employee incurs while on business for the employer. The general rule is that the reimbursement is included in the employee's income. However, prior to the tax law changes Trump pushed through at the end of 2017, the employee could then have deducted the business expenses he paid as a miscellaneous itemized deduction. The Trump tax changes suspended those deductions for most employees through 2025. So right now, most employees getting a reimbursement for business expenses paid (other than a special rule for accountable plans) have that reimbursement included in income but get no deduction for what they paid. So certainly in this case Trump did no favors for the average worker.

    You are in a similar situation. Even characterizing it as a reimbursement of funds paid to someone else, it is included in income. However, payment of rent for personal living space has never been deductible, either before or after the Trump tax changes.
     
  6. legaled

    legaled Law Topic Starter New Member

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    Thank you for the thorough reply. I appreciate it. Ugh, though...
     
  7. legaled

    legaled Law Topic Starter New Member

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    Hello. I have one other question, if you have time: what would be the wording to request "net of taxes"? Should I include the term "gross up" -- perhaps "grossed up to net the amount of any and all taxes"? After we had this "discussion", I remembered that a few years ago an employer grossed up my reimbursement for moving expenses so I would not have to pay the taxes. Thank you!
     
  8. Tax Counsel

    Tax Counsel Well-Known Member

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    You have to pay the taxes. What the gross up does is give you enough extra in the award so that once you pay the tax you are left after tax with the amount that you want. The reason that you need the formula I gave you earlier is that the extra amount you get in the award to cover the taxes is also subject to tax, so you have to do the computation correctly to reach what what the award amount would need to achieve that.

    I cannot give you specific language to use in drafting your settlement as that would be the unauthorized practice of law because, while I am a lawyer, I am not licensed in your state. You'd need to consult a lawyer in your state for the exact language that would work in your state.
     
  9. legaled

    legaled Law Topic Starter New Member

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    Sorry, I meant that the grossed up amount my employer gave me in essence covered the taxes so I netted the reimbursement for the moving expense. So, yes, I paid the taxes.

    Thank you!
     

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