Summary

Excludes from federal gross income and from federal payroll-wage definitions any judgments, awards, or settlements that are allocable to claims where an individual is a victim of a nonconsensual sexual act, sexual contact, or sexual harassment. The bill adds a new Internal Revenue Code provision to make those amounts tax-free for income tax purposes and amends FICA, FUTA, railroad retirement, and withholding rules so such amounts are not treated as wages for payroll tax and withholding purposes; it takes effect for taxable years beginning after enactment.

Key Points

• Exempts from federal gross income any judgments, awards, or settlements allocable to claims of nonconsensual sexual acts, sexual contact, or sexual harassment.
• Applies to a broad set of payment types often included in settlements (backpay, frontpay, punitive damages, attorney-fee reimbursements, and release payments) when allocable to covered claims.
• Amends federal payroll tax and withholding definitions so excluded amounts are not treated as wages for FICA, FUTA, railroad retirement, or wage withholding purposes.
• Requires Treasury/IRS to issue regulations to implement the exclusion and to define allocation and distinguishing rules.
• Takes effect for taxable years beginning after the date of enactment.
• Does not change substantive civil law rights or remedies—only the federal tax treatment of covered payments.
• May affect how settlements are structured and how payors allocate payments between taxable and nontaxable components.
• Could reduce federal income and payroll tax revenue from covered payments (magnitude depends on frequency and size of covered awards).

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