There’s a potential storm ahead for Stormy Daniels, and it’s something other than her pending suit against U.S. President Donald Trump. In a report from The Wall Street Journal, it was revealed that the adult film actress received a $130,000 “hush money” to keep her from talking about her affair with Trump shortly after his wife, Melania Trump, gave birth to their son, Barron. With this arrangement out in the open, the Internal Revenue Service will likely want to collect taxes from the said amount.
On March 6, Daniels, whose real name is Stephanie Clifford, filed a lawsuit against Trump, seeking to void a nondisclosure agreement she had with the president. Under the said agreement, Daniels is prohibited from discussing her “intimate relationship” with Trump more than a decade ago. Daniels’ lawyer contends that the agreement is null and void because it was never signed by Trump.
Outside of the court, another potential issue arises: whether or not the $130,000 settlement fee is taxable under the law.
Speaking to CNBC, Jeffrey Levine, CEO and director of financial planning at BluePrint Wealth Alliance in Garden City, whether the amount is subject to income tax will depend on the reason behind giving it.
Money received for physical injuries or sickness are typically tax-exempt, as do amounts paid to cover the emotional distress that arises from those injuries. However, other forms of settlements such as punitive damages and interest on the same are generally taxable and the burden falls on the recipient.
Any payment made with the expectation of something in return is likely considered taxable, as in Stormy Daniels’ case where she was given the money in exchange for her silence on her affair with Donald Trump.
Robert W. Wood, a tax lawyer at Wood LLP in San Francisco, further explained that settlement amounts that come with a lot of “confidentiality concerns” is within the contemplation of a commercial transaction and is considered income, and thus subject to tax.
The matter gets trickier with respect to the liability of the payor. If it’s an individual, a settlement payment is not deductible from his return since it is considered a personal expense. However, it may be deductible from the return of a business owner if the payment constitutes an “ordinary and necessary” business expense.
Michael Avenatti, counsel for Daniels, said on NBC’s TODAY Show that the starlet is willing to return the entire amount of $130,000 if needed to pursue her case.
Tax liability, however, isn’t the only issue that circulates the settlement money. Nonpartisan government watchdog organization Common Cause filed a complaint with the Federal Election Commission on January 22 in which it claimed that the payment constituted an in-kind contribution to Trump’s presidential campaign, which violates federal campaign law, New York Times reported.
Michael Cohen, lawyer for Donald Trump, denied the allegation and claimed that the arrangement was a private transaction he settled with his own personal funds as it was transacted through a limited liability company called Essential Consultants, which is run by Cohen himself.
Cohen further claimed that neither the Trump Organization nor the Trump campaign was a party to the settlement agreement with Stormy Daniels.
If it is proved that the payment was transacted directly between Daniels and Cohen’s Essential Consultants company, and without any involvement from Trump and his camp, the amount may be deductible from the business owner’s return provided that there is a clear showing that the same expense was incurred in the “ordinary and necessary” course of business.