18.2 Contingency Fees

Generally, the portion of a litigation recovery retained by an attorney as a contingency fee is taxable if the recovery itself constitutes taxable income.1  In the American Jobs Creation Act (AJCA), Congress created an exception to this rule to preclude taxation of contingency fees in most civil rights and employment law actions payable after October 22, 2004.2  In cases governed by the AJCA, the taxpayer takes an above-the-line deduction for the contingency fees rather than a Schedule A deduction.

• 1See Comm’r v. Banks, 543 U.S. 426 (2005). On the classification of various types of monetary awards for tax purposes, see Section 16.
• 2I.R.C. § 62(a)(20); see Pub. L. No. 108-357, § 703, 118 Stat. 1546, 1548 (2004).