The criminal system is supposed to make it difficult to send innocent people to jail for crimes they didn't commit. Unfortunately, mistakes happen and innocent people are locked up for crimes they had nothing to do with. According to one study, over 2,000 people were exonerated between 1989 and 2012. People who have been wrongfully convicted are often compensated for the time they spent behind bars, but they may be leaving money on the table. Here's more information about a tax law passed in 2015 to help people who receive exoneration compensation and how to take advantage of it.
President Obama Clears Up Tax Confusion
For a long time, there wasn't a clear cut rule on whether or not people who were compensated for wrongful convictions were required to pay taxes on the money. In some states, if the person was injured while in jail and the money given to them was somewhat connected to that, the compensation was treated as a personal injury award and the person didn't have to pay taxes on it.
For those who didn't sustain physical injuries, the awards were treated like income, and people had to pay federal and state taxes on it. However, in other states, the rules were murkier and even the IRS regulations didn't provide clear guidance on this issue.
In an effort to alleviate many of the problems associated with the vagueness of tax law in this area, President Obama passed the Wrongful Convictions Tax Relief Act of 2015. This law essentially makes it so people who receive money from the state or federal government for wrongful incarceration do not have to pay taxes on that cash. The law applies retroactively, so anyone who paid taxes on exoneration awards prior to the act passing can amend their tax returns and get a refund on that money.
Be aware, though, that the IRS only allows people to amend their tax returns for up to 3 years after the filing date. Additionally, the law only remains in effect for one year, so those affected must file for reimbursement by December 31, 2016. It is uncertain, at this time, whether the law will be extended or allowed to expire.
Who Qualifies for the Exemption?
This tax exemption is limited to people who were convicted of a misdemeanor or felony in a state or federal court. You must have served at least part of your sentence in jail or prison and obtained clemency, amnesty, or a pardon because you were proven innocent of the crime. People who had decisions in their cases dismissed, reversed, vacated because of proven innocence or were found not guilty at a new trial are also eligible.
Not all states have exoneration compensation programs in place. If you were wrongfully incarcerated, you can sue the government for compensation for the time you lost. For more information about the Wrongful Convictions Tax Relief Act or assistance with filing a lawsuit against the government, contact a personal injury attorney, like Gartner Law Firm.