Plaintiff attorneys working on a contingency basis have had the ability to place all or a portion of their contingency fees in several types of tax-advantaged investments since 1994*. By electing to defer fees, an attorney defers the tax obligation until the year in which payments are received. This allows 100% of your pre-tax dollars to begin working for you immediately. Deferral options include fixed income annuities, non-fixed annuities and market-based products.
WHY DEFER FEES?
Work reasons: wanting to fund next year’s overhead, marketing budget, firm expansion, purchase of a building or space for the firm, or even start your own firm.
Personal reasons: saving for the college years for children, saving for retirement, or buying a new home.
REQUIREMENTS FOR FEE DEFERRAL
Deferral language must be included in the settlement agreement
You must have your clients execute an agreement that you are deferring your fees (can be in your standard contingency contract or provided as an addendum to the contract)
Payments will be reported on a 1099-MISC as income only during the years in which the payments are received. Tax treatment hinges on avoiding constructive receipt.
To discuss which attorney fee deferral vehicle is right for you, contact Marci marci@settlewithcss.com or (407) 620-7471 to schedule a free consultation.
*In Childs v. Commissioner, 103 T.C. 634 (1994), aff’d, 89 F. 3d 856 (Table)(11th Cir. 1996), the Tax Court ruled that because the attorney’s fees were transferred from the defendant directly to the assignment company, the attorney did not have constructive receipt of the fees; therefore, the fees did not yet count as taxable income.
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