Plaintiff Double Tax Made Permanent: What Every Plaintiff Firm Needs to Know After the BBB Act

Aug 14

When Congress passed the One Big Beautiful Bill Act (BBB), it locked in several major tax provisions. For plaintiff attorneys and law firm leaders, one change stands out above the rest: the permanent continuation of the “plaintiff double tax.”

At Mirena and Company, we advise law firms and plaintiffs nationwide on how to navigate complex settlement tax issues, litigation financing challenges, and firm-level tax strategy. The BBB’s changes are a prime example of why proactive planning is no longer optional; it’s essential.

What Is the Plaintiff Double Tax?

The plaintiff double tax happens when a client wins a taxable settlement or verdict but must pay federal income tax on the entire gross recovery, even if a large percentage goes directly to their attorney as a contingent fee.

Example:
A plaintiff settles for $1 million. They pay their attorney 40% ($400,000) and keep $600,000. Under the current law, they’re taxed on the full $1 million. The attorney also pays tax on their $400,000 fee. The fee portion is effectively taxed twice.

Before 2018, plaintiffs could offset this through the miscellaneous itemized deduction for legal fees. The Tax Cuts and Jobs Act (TCJA) suspended that deduction through 2025, creating the double tax. Many assumed relief would come in 2026. The BBB permanently eliminated the deduction for most cases.

Which Cases Are Most Affected?

While certain “unlawful discrimination” claims still allow legal fee deductions, most plaintiffs are exposed to the double tax. This includes:

Emotional distress cases without physical injury
Bad-faith insurance claims
Defamation lawsuits
Punitive damages awards
Post-judgment interest
Certain sexual abuse and physical injury cases where damages are taxable

For plaintiff firms, this means more clients asking why their take-home recovery is so much smaller than they expected, and more need for strategic settlement structuring.

Other Key BBB Provisions That Impact Plaintiff Firms

The BBB made several other tax changes that law firm leaders should have on their radar:

1. No Litigation Finance Tax (Yet)

A proposed 40.8% tax on litigation funding profits was removed from the final bill. That’s a short-term win for firms that rely on litigation finance to level the playing field against deep-pocketed defendants. But the proposal is expected to resurface, so staying ahead of it is critical.

2. SALT Deduction Cap Increase

The state and local tax deduction cap increased to $40,000 for many taxpayers through 2029, then drops back to $10,000 in 2030.

3. PTET Workaround Preserved

The pass-through entity tax (PTET) remains untouched, allowing partnerships, LLCs, and S corps to deduct state taxes at the entity level, avoiding the SALT cap. For plaintiff firms structured as pass-through entities, this is a powerful planning tool.

4. Missed Opportunity for Sexual Abuse Victims

A proposed tax exemption for sexual abuse settlements didn’t make the final bill, though there may be another chance later this year in a technical corrections bill.

Practical Takeaways for Plaintiff Attorneys

At Mirena and Company, we’ve built our reputation on helping law firms anticipate, not just react to, tax and financial challenges. Here’s how we recommend adapting now:

Integrate tax strategy into settlement negotiations. Identify opportunities to characterize damages in categories that are more favorable from a tax perspective.
Use structured settlements where appropriate. This can reduce annual taxable income and improve long-term client outcomes.
Leverage PTET to lower the firm’s taxable pass-through income.
Educate clients early about the impact of double taxation. Addressing it in advance helps maintain trust and manage expectations.
Track litigation finance legislation closely. Access to case funding could change quickly, and preparation is key.

Why This Matters for Your Firm

The BBB confirms that the double tax is not a temporary headache. It is a permanent fixture. Law firms that treat tax planning as part of their core settlement strategy will not only protect clients, but also stand out in a competitive market.

At Mirena and Company, we deliver white-glove, end-to-end support that includes settlement structuring, litigation finance guidance, and tax optimization for both clients and firms. Our deep understanding of plaintiff-side operations allows us to create solutions that protect recoveries, enhance client satisfaction, and strengthen your bottom line.

If your firm is preparing for a significant settlement or wants to strengthen its tax strategy, our team is ready to partner with you.

Disclaimer: This article is for informational purposes only and does not constitute legal or tax advice. Please consult a qualified professional before taking any action.

About Mirena and Company:
We are a nationally recognized advisory firm helping plaintiff attorneys and their clients maximize recoveries through strategic tax planning, litigation finance expertise, and operational insights.

Resources