On May 16, 2013, Governor Martin O’Malley signed the Civil Rights Tax Relief Act (CTRA) into law, exempting non-economic damages from Maryland state income taxes. This is good for employees who have been unjustly terminated, as it results in a greater percentage of the award being distributed tax free to the discharged employee.
In Maryland, marginal state income tax rates range from 2% to 5.75%, and most counties impose an additional 2-3% tax. Under the CTRA, an employee who obtains a total of $250,000 in damages, of which $100,000 is compensatory damages, could well save more than $8,000 under the CTRA. The CTRA is effective for the 2013 tax year.
Under the CTRA, the amount exempted from state income taxes “includes any amount received by a claimant for non-economic damages as a result of unlawful discrimination,” and refers to the definition of “discrimination” contained in Internal Revenue Code Section 62. That section defines discrimination broadly as an act that is unlawful under Title VII, Civil Rights Act of 1991, Congressional Accountability Act, NLRA, FLSA, ADEA, Rehabilitation Act, ERISA, Title IX, Employee Polygraph Protection Act, WARN Act, FMLA, USERRA, Sections 1981, 1983 and 1985, Fair Housing Act, ADAAA, federal whistleblower protection laws, and “[a]ny provision of Federal, State, or local law, or common law claims permitted under Federal, State, or local law (i) providing for the enforcement of civil rights, or (ii) regulating any aspect of the employment relationship, including claims for wages, compensation, or benefits, or prohibiting the discharge of an employee, the discrimination against an employee, or any other form of retaliation or reprisal against an employee for asserting rights or taking other actions permitted by law.” 26 U.S.C. Section 62 (e).