by John Darer® CLU ChFC MSSC RSP CLTC
Can retired New York State lawyers with structured attorney fees take an exclusion of up to $20,000 intended for retirees on the structured attorney fee income?
According to a 1982 tax memorandum concerning Chapter 1043 of the Laws of 1981, enacted on November 11, 1981, amended sections 612(c)(3-a) and T46-112.0(c)(3-a), these amendments provide for the exclusion of up to $20,000 of pension and annuity income received by an individual 59½ years of age and over Pension or annuity income received by an individual before the age of 59½ does not qualify for the exclusion.
How do you qualify for New York’s $20,000 retiree exclusion?
- To qualify for the exclusion, this pension and annuity income must be included in federal adjusted gross income.
- It must also be attributable to personal services performed by such individual prior to his or her retirement as an employee or from contributions to a retirement plan which are deductible for federal income tax purposes.
What is a Structured Attorney Fee?
A structured attorney fee is an arrangement in which attorneys elect to defer their receipt of contingent fees from settling legal cases. The structured attorney fee payments must be set forth in the settlement agreement and release between the settling parties. If structured properly, the structured attorney fees are taxable only when received. By structuring attorney fees, an attorney or law firm can augment retirement income, levels cash flow over future years to make a contingent-fee practice more predictable, or to fund costs for future cases. And it saves money by deferring tax until future years.
Can a New York attorney or law firm structured his/her/its attorney fees if the settlement proceeds are sitting in an IOLTA account?
No
Can a New York legal partnership deduct attorney fees paid to partners?
No
Can a New York sole proprietor deduct attorney fees paid to himslef or herself?
No
Is a Structured Attorney Fee Subject to ERISA?
No
Is a Structured Attorney Fee a qualified “pension plan”?
No
What is qualified pension and annuity income for the purpose of the up to $20,000 exclusion in New York?
Qualifying pension and annuity income includes:
- periodic payments for services you performed as an employee before you retired;
- periodic and lump-sum payments from an IRA, but not payments derived from contributions made after you retired;
- distributions from government (IRC section 457) deferred compensation plans, after December 31, 2003;
- periodic distributions from an annuity contract (IRC section 403(b)) purchased by an employer for an employee and the employer is a corporation, community chest, fund, foundation, or public school;
- periodic payments from an HR-10 (Keogh) plan, but not payments derived from contributions made after you retired;
- lump-sum payments from an HR-10 (Keogh) plan, but only if federal Form 4972 is not used. Do not include that part of your payment that was derived from contributions made after you retired;
- distributions of benefits from a cafeteria plan (IRC section 125) or a qualified cash or deferred profit-sharing or stock bonus plan (IRC section 401(k)), but not distributions derived from contributions made after you retired.
Some New York personal injury lawyers have raised the interesting question of whether “periodic payments for services you rendered as an employee before you retired” means that they are eligible for the $20,000 exclusion, however the June 21, 1982 Technical Service Bulletin TSB-M-81(19)Rev.1 suggests otherwise.