Tuesday, November 16, 2010

Exonerees won't pay taxes on state awards

Thanks to a new IRS ruling, exonerees who receive compensation from the state won't pay federal taxes on their awards. Reports NPR:
Some former inmates who were wrongly convicted say they feel twice cheated — first for being imprisoned and then again when the government that locked them up taxed them on the money they were paid to make amends.

A recent Internal Revenue Service decision, however, means the federal government will no longer collect income tax on that money, allowing exonerated ex-inmates nationwide to keep payments meant to compensate them for their time in prison.

Texas attorney Kevin Glasheen, who represents a group of inmates exonerated by DNA evidence, said the government had been "giving with one hand and taking away with the other."

"It doesn't make sense when the government is the one that perpetrated this injustice and the government steps forward to correct it and then the government turns around and says, 'We want to take a third of it back,'" Glasheen said.

The IRS had been treating compensation as income, taxing it at a rate that varied depending on a former inmate's tax bracket. But in an internal memo released Friday, IRS officials agreed to reinterpret existing law so that compensation is treated the same as money received in a personal injury settlement. Such settlements are not subject to income taxes.

Glasheen, who brought his exonerated clients to Washington to lobby lawmakers and the IRS for the rule change, said former inmates proven innocent must show some form of personal injury suffered as a result of long-term incarceration.
Texas increased compensation levels for wrongful convictions in 2009 to $80,000 per year falsely incarcerated in a lump sum plus a like amount in a lifetime annuity. This news means they won't have to share the state windfall with Uncle Sam. Great news: Congrats to all the exonerees and to Kevin Glasheen for helping pull this off.


Mike Howard said...

Any word on whether this reinterpretation is only on payouts moving forward or if the IRS is applying this retroactively?

Gritsforbreakfast said...

According to NPR, "Inmates who already paid federal income taxes on their compensation have a three-year window to file for refunds."

Anonymous said...

Basically, IRS rules normally state that a taxpayer receiving lawsuit proceeds from a non-physical injury claim cannot exclude any amount for payment to compensate for an intangible emotional distress value. The taxpayer can only exclude an amount for actual out of pocket medical costs. Punitive damages are also taxable.

This is a big about-face on the part of the IRS, and may open the door for other types of victims to collect their damages tax-free.

Anonymous said...

Ha, excellent:) A rare departure from their usual vampiric antics.

Anonymous said...

Now if that Dallas DA can just figure out how to carve some of that money for his own use... Finally, crime does pay.