Taxing your lawsuit award may be a topic that you haven’t considered in years. In this article, you’ll learn about the taxation of your lawsuit award and the impact that a recent tax change may have on it. This article also addresses the taxability of emotional distress damages in a lawsuit. Hopefully, you’ll be better informed about this important topic when you’re settling your lawsuit. If you have any other questions about the taxation of your lawsuit award, contact us today.
Taxation of a lawsuit award
If you win a lawsuit, one of the first questions you’ll need to ask is, “Does the money I receive after a judgment or award of damages have to be paid as income?” A lawsuit award is almost always taxable, even if the plaintiff is not entitled to it. Even if the plaintiff receives an award of money for pain and suffering, it is still income. This is especially true of awards for lost wages, which can result from an employment-related lawsuit. While lost wages are generally exempt from taxation, the damages awarded in such cases are also taxable by New York State and the IRS.
There are exceptions to the taxation rules for certain damages, such as punitive damages. Punitive damages, back pay, and interest on unpaid money are usually taxable. Similarly, attorneys’ fees are generally taxable. However, some lawsuits allow attorney’s fees to be deducted. This may be a good choice for a plaintiff, particularly if the settlement is significant. In any case, it is best to consider tax planning before agreeing to a settlement.
The taxation of a lawsuit award depends on the details of the case, including the damages. In general, damages for physical injuries are not taxable. However, if you choose to deduct your medical expenses as part of the settlement, you may be liable to pay taxes on the damages. In addition, you cannot take the same deduction twice. You may wish to plan your settlement payments to spread your tax burden. Once you know the tax consequences of a lawsuit award, you can work towards minimizing the burden on yourself and your family.
Impact of the tax change on lawsuit award
An important tax change has recently occurred. The American Jobs Creation Act of 2004 amended the Internal Revenue Code, making a lawsuit award taxable only to the extent that it resulted in physical injury. As a result, lawsuit awards are taxable only to the extent that the award is for property damage or personal injury. These changes are important since the tax law governing lawsuits has changed significantly in the last 20 years.
Damages awarded in a lawsuit arising from an employment discrimination case are not deductible. Moreover, attorneys’ fees and other expenses related to producing taxable income are allowed. Generally, only pain and suffering are subject to tax. Similarly, reimbursement of out-of-pocket medical expenses can be exempt from taxation if the original cost of the medical expenses was not previously deducted. However, if the award is for physical injury or sickness, it may not qualify for tax benefits.
A settlement is taxed according to the plaintiff’s “origin of the claim.” For example, if a laid-off worker sues a former employer for discrimination, the settlement will be treated as a wage. The former employer will likely withhold employment tax and income tax from the settlement. However, the tax implications of a lawsuit award are often less apparent than they might seem. When filing for a lawsuit, it is important to consult a tax expert early on in the resolution process to avoid surprises.
Taxability of emotional distress damages in a lawsuit
Although compensatory damages for physical injuries are not taxable, emotional distress damages are subject to income taxes. However, careful analysis can eliminate the need for this type of tax. This article will examine the taxation of emotional distress damages in a lawsuit award. Generally, these damages are taxable if they are physical, but some physical symptoms are not. Therefore, the attorney representing the plaintiff must carefully draft the settlement agreement to protect the client’s interests.
In addition to physical injury, the IRS considers emotional distress to be a form of mental harm. The IRS has interpreted physical sickness and injury as injuries that are observable to a physician. However, emotional distress does not necessarily manifest in physical symptoms. However, emotional distress can be caused by the work environment. This makes it more difficult to calculate whether the compensation you receive is taxable. So, it is important to remember that any mental distress caused by a workplace injury is not taxable.
A jury can also determine whether the taxable damages are compensatory or punitive. Physical injuries, on the other hand, are generally nontaxable. This is why the jury awarded $550 million in compensatory damages but $4.14 billion in punitive damages. In other words, the jury was very careful to identify the different types of damages. Therefore, it’s important to carefully structure your award to distinguish the two types of damages to determine their taxability.
