Lawyer and IRS will take huge bites
By
Will Collette
When
Charlestown filed
the meeting notice for the special settlement signing meeting it will have
with Town Council member Lisa DiBello, it revealed some heretofore unknown
details, such as the exact amount that will come out of the $450,000
settlement for DiBello’s lawyer, Robert Savage.
Savage
will receive $132,000 of that 450,000, or just under 30% which is within the
normal range for a lawyer who takes a civil case on a contingency fee basis.
That
will leave DiBello with $318,000.
However,
she will be liable for federal and state income taxes on that settlement and
possibly other taxes. Here’s how tax
expert Yvonne Michelle, MBA, describes the tax rules:
"According to the IRS, ‘all income is taxable from whatever source derived, unless exempted by another section of the Code’ (IRC Section 61)….In cases where there is no physical injury or sickness involved, such as wrongful employment discharge, employment related, discrimination, libel (defamation of character), etc., awards are typically taxable. Damages received related to economic loss, lost wages/income, and benefits are also all taxable….[Y]ou would generally deduct the attorney fees on Schedule A as a miscellaneous itemized deduction. If any of the settlement was allocated to damages for actual out of pocket medical costs attributable to the claim and those costs were not deducted in a prior year, that piece of the settlement may be able to be excluded. The settlement should clearly dictate how the settlement was allocated. In addition, you have to consider whether this income is subject to employment taxes.”
For
“miscellaneous expenses,” such as Savage’s $132,000 fee, IRS allows you to
deduct everything over 2% of adjusted gross income. Assuming DiBello has no
other income other than this $450,000 settlement, the excluded first 2% comes
to $9,000 reducing the amount she can deduct to $123,000.
Just
looking at the settlement income alone, and not any other income DiBello might
have, she would fall into the 33% tax bracket
for federal income tax on $327,000. Taking into account the complex
calculations that having income that spans five tax brackets cause, her federal
tax bill may be around $100,000.
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| From the Mohegan Sun website |
She
will be in the top Rhode Island
income tax bracket of 5.99%. Again, because of tax brackets, there are more
mind-numbing calculations, but the final Rhode Island income tax figure will
probably be around $15,000.
Depending
on the exact wording of the settlement, DiBello may also have to pay such
employment-related taxes as Social Security, Medicare, FUTA or TDI. Tax expert
Yvonne Michelle says you really must consult with a qualified tax advisor or
attorney to do this right. She
also recommends reading IRS’s publication on how it looks at and audits
settlement awards.
Anyway,
after attorney’s fees and all the taxes, Council member DiBello should have
about $200,000 left, more or less, to pay off bills and go to Foxwoods or
Mohegan Sun.
I
already reported to you on the town’s earlier announcement where they said
how they will pay the $450,000. The town says the insurance company will pay
$50,000 and Charlestown taxpayers will pay the remaining $400,000.
The
town plans to drain the town’s legal contingency fund of $382,959.82.
The
remaining $17,042.18 will come from some other source. Perhaps Town Hall staff
will pick up cans and bottles thoughtfully left along our roadways by our
summer visitors and take them to Connecticut for the five-cent deposit on each.
The
Town Council will have to figure out a way to put money back into the legal
contingency fund – we’re going to need it when
the CCA Party boys become the majority on the Zoning Board of Review and
start making decisions that will generate a boatload of lawsuits.
In
announcing the $450,000 settlement with DiBello, the Town Council also claimed
that the settlement will have no effect on taxes. Right.
As if the $400,000 the insurance isn’t covering will appear out of thin air. Like any other outlay the town makes, whether it’s buying a box of paperclips or buying the Whalerock land or paying DiBello the $450,000 settlement, that’s our tax dollars at work. Charlestown taxpayers do not need yet another lie.
As if the $400,000 the insurance isn’t covering will appear out of thin air. Like any other outlay the town makes, whether it’s buying a box of paperclips or buying the Whalerock land or paying DiBello the $450,000 settlement, that’s our tax dollars at work. Charlestown taxpayers do not need yet another lie.