The American Jobs Creation Act of 2004 will allow certain relief to taxpayers who receive settlements or court awards in employment discrimination cases. This legislation is meant to deal with an issue which has been the subject of differing decisions in the Federal Appeals Courts.

Prior to this legislation, successful litigants were required to pay taxes on money which they didn’t get to keep. They were required to pay taxes on an entire award or settlement, even though part of the money received went directly to their attorney to pay legal fees, and without regard to the fact that the attorney also paid taxes on this part of the award. A bill to fix the problems, the Civil Rights Tax Relief Act, has languished in Congress for nearly five years without success until this provision was added to the Jobs Creation Act.

Congress has created a special deduction in these cases for attorneys’ fees and court costs. This will be an above the line deduction which will appear on the Federal Income Tax Returns for adjusted gross income. Accordingly, this deduction can be claimed without regard to whether or not a tax payer files an itemized return.

The law will not be retroactive and will be effective only for fees and costs relating to any judgment or settlement that occurs after the effective date of the legislation.

The Internal Revenue Service has favored this double taxation for years and its policy is presently the subject of two cases set for argument in the United States Supreme Court in November. In these cases, Commission of Internal Revenue v. Banks and Commission of Internal Revenue v. Banaites, the tax payers both won awards in employment disputes and challenged the fact that they were taxed on the entire amount. This new legislation which overturns the disputed policy has created great uncertainty in these cases. This new legislation was supported by various groups including the National Employment Lawyers’ Association, AARP, National Whistle Blower Center, US Chamber of Commerce, Lawyers’ Committee for Civil Rights Under Law, the Bazelon Center for Mental Health Law and the NAACP.