The Kardashians are getting richer. Sisters Kourtney, Kim and Khloe Kardashian won their royalties from the Kardashian Beauty makeup line. After a five-year lawsuit, a California State Appeals Court judge agreed the Kardashians were owed $ 11.5 million in royalties from Haven Beauty and its subsidiary Hillair Capital, which licensed the beauty line, which included various in-store beauty items . The award adds $ 2 million in interest and expenses following the ruling. The Kardashians were owed a $ 1 million advance payment plus ongoing fees, but when they ran out of millions they sued. The court ruled in favor of the Kardashians in 2018, and the appeals court upheld it. The IRS will collect a stake, and that stake will be substantial. This was a royalty dispute and royalties are taxed as normal income. In contrast, a sale of intellectual property can sometimes qualify for lower capital gains rates. At the current rates, capital gain is 23.8%, while ordinary income taxes are 37%. Both ordinary income tax rates and capital gains are to be increased according to President Biden’s proposals. In fact, Biden would double the capital gains tax retrospectively. Paying up to 43.4% capital gains tax sounds devastating.
SANTA MONICA, CALIFORNIA – NOVEMBER 10: (LR) Kris Jenner, Kourtney Kardashian, Khloé Kardashian and … [+]
Most court settlements are taxed, but treatment depends on how you were harmed, how the case was resolved, how checks and IRS 1099 forms were drawn up, and more. Lawsuits for infringement of patents or other intellectual property typically require lost royalties, a stream of payments that the owner would have received had it not been for the infringement. Most people will likely say that a stream of royalties is taxed as normal income. Amazingly, however, some patent infringement damages can be taxed as capital gains. Although capital gain usually means the sale of something, it is sometimes possible for inventors to treat the settlement proceeds from patent litigation as a capital gain. It’s just one of many whimsical tax regulations that deal with the taxation of litigation claims. Regardless of whether you win a settlement or a judgment, in most cases you will have to pay taxes. You can influence how your recovery is taxed by dealing with these issues, and it is common to argue while resolving a legal dispute.
Fortunately, if you are suing for personal injury like a slip or a car accident, claims for damages should be tax exempt, even if you are claiming lost wages because you couldn’t work after your injuries. Section 104 of the tax code protects against compensation for personal injury and physical illness. However, your injury must be “physical” and it is not exactly clear what that means. The tax law distinguishes between money for physical symptoms of emotional distress (such as headache and abdominal pain) and physical injury or illness. The problem occurs in employment relationships where plaintiffs claim their employer has made their health worse or caused them PTSD. Tax law is uncertain, but it can be argued that PTSD is itself a physical illness. An agreement between plaintiff and defendant is not binding on the IRS, but what the parties say in the agreement is often followed in an audit. Therefore, it is advisable to try to reach an agreement with the defendant on the tax issues. Tax reporting is a key issue. If you don’t say anything about tax in a settlement agreement, you will almost always get the IRS Form W-2 or Form 1099.
The tax treatment of legal fees can be particularly worrying. In most cases, a 1099 Form will say you received 100% of the money, even if 40% went straight to your attorney. As of 2018, many legal fees are no longer deductible, so plaintiffs can be 100% taxed on their legal fees with no tax deduction. The math was bizarre when taxes cut a Roundup weed killing ruling by $ 2 billion. If your case is completely tax exempt (e.g. a car accident that left you injured) it won’t cause any tax problems. But if your recovery is taxable, be careful. For example, let’s say you settle a willful emotional distress lawsuit against your neighbor for $ 100,000, and your attorney keeps $ 40,000. You might think you had an income of $ 60,000. Instead, you have an income of $ 100,000 and may not be able to deduct the $ 40,000 at all. Because of this, many clients say they pay tax on monies (the legal fees) they never received. It can lead you to look for ways to deduct legal fees even after the new tax law.
However, if your case is a claim against your employer or other defined forms of unlawful discrimination, there is an “above the line” deduction for legal fees. But you should be careful outside of employment or other unlawful discrimination disputes. There are sometimes ways to get around these rules, but you will need sophisticated tax assistance before your case is settled.