The One Big Beautiful Bill Act (“BBB”) made permanent several temporary provisions of the Tax Cuts and Jobs Act of 2017 (“TCJA”), while also introducing changes to numerous items related to individual income tax. Several provisions in the BBB affect personal injury plaintiffs and plaintiff firms.
The Plaintiff Double Tax Is Here to Stay
When a plaintiff receives taxable proceeds from a verdict or settlement, they’re taxable on 100% of it. That’s true even when the plaintiff keeps only 60% after subtracting 40% for their lawyer’s contingent fee. Of course, their lawyer still pays tax on that amount. Thus, the fee portion is taxed twice.
The double tax hits plaintiffs bringing many types of claims, including those for emotional distress in the absence of physical injuries, bad faith denials of insurance coverage, and defamation. It also hits plaintiffs in many sexual abuse cases and other physical injury cases with taxable proceeds, including punitive damages and post-judgment interest.
Legal fees have long been deductible under the miscellaneous itemized deduction rules. However, the TCJA eliminated the miscellaneous itemized deduction for tax years 2018 through 2025. That created the “plaintiff double tax.”
Many hoped that the TCJA’s elimination of the deduction would expire on December 31, 2025, when most of the TCJA’s tax changes were scheduled to sunset. However, the BBB permanently eliminated this deduction. Legal fee deductions are still available in limited settings, including in cases of “unlawful discrimination.”
BBB Made the TCJA’s Lower Tax Rates Permanent
The TCJA reduced individual tax rates at nearly all levels of taxable income, with the most significant benefits accruing to those at higher income levels. If the TCJA’s reduced tax rates had expired on December 31, 2025, the top three income brackets would have paid federal income tax rates of 33%, 35%, and 39.6%, respectively.
The BBB made the TCJA’s reduced tax rates permanent. Thus, the top tax rate will remain at 37%.
An earlier version of the BBB included a punitive tax on litigation finance companies. Especially when plaintiff firms oppose wealthy corporate defendants, access to litigation finance can be critical. Many opposed the new tax, which was removed from the final version of the BBB. Unsurprisingly, many believe it will be proposed again.
The change would have imposed a tax equal to the highest individual rate, plus 3.8%, or 40.8%, on “qualified litigation proceeds received by a covered party.” A covered party was “any third party to a civil action which receives funds pursuant to a litigation financing agreement and is not an attorney representing a party to such civil action.” “Qualified litigation proceeds” were “realized gains, net income or other profit received by a covered party during the taxable year which is derived from, or pursuant to, any litigation financing arrangement,” and could not be reduced by “any ordinary or capital losses.” This is all to say – it would have obstructed most litigation finance.
Says University of Chicago Law School Lecturer Michael Kelley, “The proposed litigation finance tax would have had the most negative impact on individuals and small and medium size businesses, which would lose access to funding necessary to litigate meritorious claims against much larger and well-funded tortfeasors and infringers. The bill would also have stifled technological innovation, resulting in tax revenue losses far exceeding any projected tax revenue gains payable by litigation funders under the proposed bill.”
No AI Regulation Moratorium
Artificial intelligence (“AI”) is making it easier for bad actors to engage in unlawful or criminal behavior, such as creating algorithms that make discriminatory employment decisions and powering “deep fake” technology that creates fake or obscene images of others. In response to this rising threat, states and localities are considering legislation that would regulate the use of AI.
An early version of the BBB threatened the ability of states and localities to do so. That version included a provision imposing a 10-year moratorium on state and local enforcement of “any law or regulation . . . limiting, restricting, or otherwise regulating artificial intelligence models, artificial intelligence systems, or automated decision systems entered into interstate commerce.” The bill would have made AI regulation the sole province of the federal government for the next decade. However, the final version of the BBB dropped the moratorium.
SALT Deduction Gets a Bump, and PTET Remains Intact
One of the TCJA’s most controversial provisions was limiting the individual taxpayer deduction for state and local tax (“SALT”) payments to $10,000. Many saw the provision as an effort by Republican lawmakers to punish individuals who live in “blue” high-tax, large-population states like California, New Jersey, and New York.
The BBB increased the SALT deduction cap to $40,000 for 2025 for taxpayers making less than $500,000, which will increase by 1% each year from 2026 through 2029 before reverting to $10,000 in 2030. Taxpayers with a modified adjusted gross income of over $500,000 have a $40,000 cap that is phased downward to a $10,000 floor in 2025 through 2029.
Equally relevant for plaintiff attorneys who own firms organized as pass-through entities like partnerships, limited liability companies, S corporations, or sole proprietorships is that the final BBB does not contain a restriction on state-level pass-through entity tax (“PTET”) that an earlier version had. PTET is a workaround developed by states after the TCJA. Because the SALT deduction cap generally does not apply to entities, with PTET, a pass-through entity can deduct the amount of the state tax it paid, reducing the taxable income allocated to its owners and avoiding the $10,000 SALT limit. The owners of the pass-through entity receive a state tax credit equal to the amount the entity paid.
Opportunity Missed for Sexual Abuse Victims
Though legislation was introduced earlier this year to exempt from tax recovery proceeds received by sexual abuse victims, that change didn’t make it into the BBB. There are legislative opportunities later in the year, including in a technical corrections bill.