Sources say a majority of JPM's $13bn settlement is tax deductible (Photo: Reuters)
Sources say a majority of JPM's $13bn settlement is tax deductible (Photo: Reuters)

JPMorgan is set to shave $4bn off its mortgage probe settlement with US authorities as a large slice of it is tipped to be tax deductible.

According to unnamed sources cited by Reuters, US authorities are poised to receive less than they expected and are currently thrashing out a tax treatment of the settlement with JPM.

Usually banks are able to deduct legal settlements from their taxes but they forgo any tax benefits if they are found to have violated the law.

The bank initially sealed a tentative $13bn (£8bn, €9.5bn) settlement with a group of regulators, led by the Department of Justice (DoJ), to put an end to government probes over mortgage products.

But because the deal involves different regulators, the total amount will comprise a mix of fines and compensation.

Sources say that the settlement is expected to include a $2bn penalty to the DoJ while a $4bn slice will be used to help struggling mortgage borrowers. This means the aid package is tax deductible but the financial penalty is not.

However, sources say that it's unclear whether the remaining $7bn will be used to compensate investors or whether it is a bumper financial penalty.

Although financial penalities are not tax deductible, regulators have the authority to negotiate a tax deal with the bank.

JPM was not immediately available for comment at the time of publication.

When Will It End?

JPM has already saved billions on tax deductible legal expenses despite being hit by $9.2bn bill which has resulted in the US banking giant posting its first ever quarterly loss under chief executive Jamie Dimon.

The legal expenses worked out as $7.2bn after taxes and included money JPM is setting aside for future settlements with authorities.

JPM has set aside a total of $23bn to pay for legal issues, and faces more than a dozen probes globally.

The bank has already been hit with nearly $1bn in fines related to the London Whale trading scandal, which has cost the bank billions of dollars in legal losses.

In addition, JPM was ordered to refund $300m to customers after US regulators ruled that two million clients were harmed by the bank's debt collection procedures and other credit card practices.

Again, this is a refund order, not a fine, so it is tax deductible but regulators and prosecutors can still slap JPM with financial penalties in the future.