Depp’s $50M suit against Amber Heard is for defamation, which means 37% federal tax and 13.3% California tax. If Depp wins $50M but must pay 40% to his lawyer, he nets $30M. But he could have to pay tax on $50M unless he can find a way to deduct his legal fees, which is not always possible.
It’s hard to look at the spectacle but curiously hard to look away too. In some ways, it can make you feel lucky that you’re not among the rich and famous. Do they have tax problem, too? Surprisingly, there are some big tax issues at play that might be creeping up on the once smitten couple. Depp’s $50M suit against Amber Heard is for defamation, so if he wins, how is that taxed? As ordinary income, which means 37% federal tax and 13.3% California. And if you don’t play your tax cards just right with passthrough entities and elections, no matter how many millions in California tax you pay, your tax deduction on your federal tax return is only $10,000. And if Depp is using a contingent fee lawyer, his taxes could get even worse. Suppose that Depp wins $50M, but must pay 40% to his lawyer. That means Depp would net $30M, and you might assume he would pay tax on $30M. However, since 2018, some plaintiffs in contingent fee cases are taxed on their gross recoveries, not net after legal fees. Some call it a new tax on legal settlements. Being creative is needed and checklists of ways to deduct legal fees can help. Why worry about deducting legal fees in the first place? Most plaintiffs would rather have the lawyer paid separately and avoid the need for the deduction, but it is not that simple. If the lawyer is entitled to 40%, the plaintiff generally will receive only the net recovery after the fees. But under Commissioner v. Banks,543 U.S.426 (2005), plaintiffs in contingent fee cases must generally include 100% in income, even if the lawyer is paid directly.
