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| Milestone Consulting, LLC

Those affected by the Deepwater Horizon Oil Spill have experienced job loss, home loss, injury and sickness. In March 2012, BP reached a $7.8 billion settlement intended to cover these losses. The settlement should be going into the pockets of those who have suffered the devastating effects of the oil spill, but how much will also go to the IRS?

The acceptance of settlement recovery can push business and individual claimants into higher tax brackets, allowing them to retain less of their recovery. By taking settlement payments out over time as opposed to accepting a lump sum, claimants may reduce their taxes by remaining below the threshold for many deductions, credits and/or allowances that phase out with increased income.

What types of deductions can begin to phase out with an increased Adjusted Gross Income (AGI)?

  • Home mortgage interest
  • Taxes
  • Charitable contributions
  • Miscellaneous itemized deductions subject to the 2% limit, including employee business expenses
  • Federal estate tax in respect to a decedent
  • Impairment-related work expenses
  • Amortizable bond premiums on bonds acquired before 10/23/86
  • Unrecovered investment in a pension
  • Repayments of income previously taxed

Because the settlement process is voluntary, there is a one-time tax planning opportunity as part of the resolution of a claim. This decision must be made prior to settlement.

Income Spreading

Executives who receive large bonuses know that by diverting at least a portion of that bonus to their 401(k), they can lower their taxable income for that year.

Much the same, claimants should carefully review their options for income spraeding over a number of years. For businesses that accept a lump sum recovery, as much as 40-45% could be lost to state and federal taxes (unless they have losses in the current tax year). The acceptance of a lump sum will likely move the claimant into a higher tax bracket and will negatively affect tax deductions.

For more information about who qualifies to file a claim in the Deepwater Horizon Oil Spill settlement, visit:

BP also released a Claims Program FAQ, which can be found here:

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