The Internal Revenue Service considers lawsuit settlements to be income and requires you to pay taxes on them. If you receive a lawsuit settlement for physical or emotional harm, the amount is taxable if the money made you whole. However, if the money you receive is for punitive damages, the money is not taxable. The following are some common reasons why lawsuit settlements are deemed a taxable event.
Generally speaking, personal injury settlements are not taxable, but they can be subject to the “above the line” deduction.
If you have suffered a spinal cord injury, for example, the money you receive in compensation is exempt from taxation. If you are uncertain whether your lawsuit settlement is taxable, consult a tax advisor or Certified Public Accountant. Fortunately, it is easy to claim emotional distress.
When receiving money from a lawsuit, be careful to identify what is taxable and what is not. You may receive a large settlement, but it is important to remember that most lawsuit winnings are taxable. It is important to consult with your attorney and accountant before filing your taxes so you’re not surprised by a surprise on your income tax return. When filing taxes, remember to include any amounts that you are awarded as compensation for emotional distress.
A lawsuit settlement is taxable if you are awarded a higher amount than you expected from the original case.
You will have to pay taxes on the damages based on the underlying cause of your suit. Generally, the compensation received from a lawsuit is not taxable if it is for physical injury or sickness. In this scenario, you will receive a tax refund for the total of the punitive damages plus the attorneys’ fees.
Taxable damages are generally not taxable for non-injury lawsuits. But, the IRS does not tax personal injury settlements. A personal injury settlement will be taxed if the plaintiff sustained pain or loss caused by a person’s accident. In general, a legal claim is taxable for a non-injury injury. Nevertheless, you should consult your attorney before accepting a settlement.
The IRS treats emotional distress settlements as income.
The IRS does not consider the medical expenses of a plaintiff. This is because a lawsuit settlement is not taxable when it is paid as an agreed-upon amount. In such a situation, a plaintiff may want to collect the settlement proceeds as soon as possible to avoid paying taxes. If the plaintiff receives a substantial sum of money, it will be taxable, and any amount over that amount will be taxed.
The IRS treats personal injury awards and jury verdicts as taxable income. In addition, money received for emotional distress is not taxable. But, if the settlement does not involve a business or property, it is a taxable event. For example, a wrongful death verdict is taxable. If the plaintiff wins the lawsuit, the IRS will tax the damages and interest as ordinary income. But, punitive damages are generally deductible.
The amount of money received from a lawsuit is taxable.
There are many exceptions to the rules, and some lawsuit settlements are taxable. If you receive a monetary award for emotional pain, it is deemed a taxable event. Defamation is also taxable. For example, a person who is fired due to harassment or discrimination may receive an unjust termination that is taxed.
In a personal injury lawsuit, the IRS does not tax compensation for “observable bodily injury.”
In contrast, a spinal cord injury lawsuit settlement will not be taxed. Regardless of which type of personal injury settlement you receive, consult a CPA, a tax lawyer, or a Certified Public Accountant to make sure your settlement is tax-free. The IRS will not assess any monetary compensation for a spinal cord or other types of disability, but if you do receive a monetary payment for paralysis, the money will not be taxable.
If you win a lawsuit, you will be paid a lump sum of money. This is taxable if it is a judgment and the amount of the damages is not more than $5 million. For the other kind of damages, such as punitive damages, the IRS will not include the amount you receive in your tax returns. The IRS will only include the amount you win, minus any damages that were paid to you.