The case against Rudy Giuliani, former Trump lawyer and advisor, is revealing a portion of our current income tax code which most will find patently unfair. It amounts to the federal government legally receiving taxes twice on the same income.
Mr. Giuliana was hit with a $150M judgement on a defamation of character lawsuit filed by a couple of former Georgia election workers. He immediately filed for protection under the US Bankruptcy Code. But whether or not he ends up paying this judgement or even a portion of it is not the point of this column.
Any payments he does make on the judgement, will probably be deductible on his side of the case. A strong argument could be made that this payment was a result of his legal work for the former president, so those payments would probably be deductible.
But that’s not the case for the Plaintiffs. In order to explain this dichotomy, let’s say Mr. Giuliana actually pays the judgement in full.
All receipts for punitive damages are taxable as regular income, even if they result in death or serious injury. What makes this even more ridiculous is the fact that if the judgement is paid, the former election officials can’t even deduct their legal expenses.
Under the 2017 Tax Cuts and Jobs Act (TCJA), there’s no place on form 1040, where an individual can deduct legal fees. The Plaintiffs would be taxed on the entire $150M.
Let’s also say that the contingency fee they’d pay their lawyers was 33% or $50M. When the lawyers received this fee, they’d also be taxed on the same money.
Effectively the Federal Government would receive taxes twice on the same money allowing for a legal double dip.
Let’s also take a moment to do some math. The Plaintiffs receive $150M. $50M goes to the lawyers. They then have to pay a 37% federal tax and a 5% state tax on the entire $150M which comes to $63M.
After all of this they’re left with a paltry $37M. That isn’t even 25% of the judgement.
The truly ironic part of this is the fact that prior to the 2017 TCJA, there was a place on the 1040 where they could have deducted legal expenses, and former President Trump was the main impetus behind passing that tax legislation.
Let me leave you with this.
Once our hangovers have subsided and the ridiculous amounts we just paid for overpriced food and booze sinks in, we should take a moment to recognize the passing of 2023. Whether it was a good or a bad year, probably depends on how you look at it.
Will next year be easier or more difficult? Who knows. If I had a crystal ball, I’d sit and play the stock market for a living instead of doing tax returns.
But one thing is certain. No matter what the new year brings, I’ll be there for all of you.
Will the economy recess or find a soft landing? Will the wars in Eastern Europe and the Middle East ever end? Who will win the next Presidential Election? Will the election bring civil unrest to our neighborhoods? And how do we employ our scarce resources to combat any of these potential threats?
These are all good questions, but completely outside the control of any entrepreneur. We cannot change these situations. We can only respond to them.
Please go into this New Year knowing that whatever happens you aren’t in this thing alone. I’m right there with you. Good, bad, or anywhere in between, I’m not going anywhere.
May whatever God you pray to bless you, your family, and your business, with happiness, health, wealth, and joy in 2024 and always.
We’re all going to get through this. Let’s get through it together.
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