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- E. Jean Carroll is seeking more damages from Trump in her second defamation trial.
- But she could have to pay a hefty amount in taxes — known as the "plaintiff double tax" — on those damages.
- It's all thanks to a tax bill that Trump signed in 2017, when he was president.
E. Jean Carroll is seeking more damages in her second defamation trial against former President Donald Trump.
But she'll likely face a huge tax bill for those damages — and it's all thanks to a law that Trump signed when he was president, according to a
Trump signed the Tax Cuts and Jobs Act in 2017 and it went into effect in January 2018.
The measure gave everyone a larger standard deduction, but the law also took away the ability for plaintiffs to deduct legal fees in many types of cases, including defamation cases, so the government wouldn't lose too much in revenue.
The law made it so that plaintiffs can sometimes deduct legal fees as a business expense, which is an expense typically paid for the purpose of your trade or business.
But that's not an option in defamation cases, said Jeremy Babener, the president of Structured Consulting and a former Fellow in the US Treasury Department's Office of Tax Policy.
"What's tricky in the defamation world is it's kind of a mix of business and personal for a lot of people," Babener told Business Insider. "Your personal reputation is very much intertwined with your business reputation. And the IRS and the courts have generally concluded that defamation is inherently personal, which means you can't deduct legal fees in a defamation case as a business expense."
It's what's known as a plaintiff "double tax."
Before the law was passed, "plaintiffs could list their attorney's fees as a deduction on their tax returns, avoiding paying tax on the attorney fee portion," said Amicus Settlement Planners, a Utah-based financial planning firm.
But now "individual plaintiffs cannot claim a deduction for attorney's fees except in limited circumstances, resulting in plaintiffs paying taxes on the entire gross recovery, including 100% of their attorney's fees."
Here's an example: If a plaintiff gets $1 million in damages from a defamation case, and their lawyer gets 40% of it, the plaintiff would pocket $600,000, while their lawyer would get $400,000.
"You would think you're only going to get taxed on the $600,000 that you keep," said Babener, who is a lawsuit settlement expert. "That's how it should work. But you can't deduct your legal fees because defamation cases are inherently personal, meaning you get taxed on the full $1 million, and then your lawyer also gets taxed on the $400,000 that they get."
"That's the plaintiff double tax — the attorney's fees portion of it gets taxed twice, once to the plaintiff and once to the law firm," he added.
Carroll was awarded $5 million in damages last year after Trump was found liable for sexually abusing her in the 1990s and later defaming her when he accused her in 2022 of lying about the rape.
The second case centered around whether Trump similarly defamed Carroll when he called her a liar in 2019. But the judge determined in September that Trump had already been found liable for defaming Carroll, meaning the second trial focuses purely on whether Trump owes Carroll additional damages.