Sponsors (2)
The bill increases the after-tax value of settlements for survivors of sexual assault and harassment—encouraging redress—but does so at modest fiscal cost and with added administrative and payroll-reporting complexity for payors and tax authorities.
Victims of sexual assault or harassment who receive judgments or settlements will keep more of their recovery because qualifying amounts (including back pay, front pay, punitive damages, and attorney-fee reimbursements) are excluded from federal income and payroll taxes.
Making these recovery amounts tax-free reduces financial barriers and may encourage more survivors to pursue redress and settlements by increasing the net value of relief.
The Treasury is directed to issue guidance separating excluded amounts from other recovery components, which should clarify tax treatment and reduce uncertainty and disputes with the IRS over characterization of awards.
Excluding these recovery amounts from taxable income and payroll taxes will modestly reduce federal income and payroll tax receipts, creating a potential budgetary cost borne by taxpayers.
Determining which portion of a settlement qualifies for the exclusion may create administrative burden and disputes among taxpayers, employers, payors, and the IRS over characterization and allocation of awards.
Employers or insurers who pay settlements may face increased payroll reporting complexity and risk of withholding errors until the Treasury issues detailed regulations and guidance.
Based on analysis of 2 sections of legislative text.
Excludes monetary recoveries allocable to nonconsensual sexual acts, sexual contact, and sexual harassment claims from gross income and from wage definitions for payroll tax and withholding.
Excludes from federal gross income monetary recoveries (judgments, awards, settlements, back pay, front pay, punitive damages, and related attorney-fee reimbursements) that are allocable to claims where an individual was a victim of an alleged nonconsensual sexual act or sexual contact or to claims of sexual harassment. It also excludes those amounts from wage definitions used for Social Security, railroad retirement, FUTA, and income tax withholding. The changes apply beginning in taxable years after enactment and instruct the Treasury to issue implementing guidance.
Official title: Amend the Internal Revenue Code of 1986 to exclude from gross income any judgements, awards, and settlements with respect to sexual assault or sexual harassment claims, and for other purposes.
Introduced February 13, 2025 by Kirsten Gillibrand · Last progress February 13, 2025