Are Lawsuit Settlements Taxable?

How to Determine Whether You Will Have to Pay Taxes on Your Settlement

When you receive a lawsuit settlement, the last thing on your mind may be how much you will have to pay in taxes. The reality is that there generally are tax consequences for judgments and settlements. Failure to take these into consideration may result in an unexpected financial burden.

At The Beasley Firm, we represent individuals who have been injured due to another person’s negligence or wrongdoing. We fight to secure the largest possible recoveries for our clients. Throughout the process, we can help you understand all of the potential implications of a settlement or verdict. Contact our office at (215) 866-2424 to discuss your case with an attorney. All consultations are free and confidential. 

Will My Settlement Be Taxed?

The answer to whether your lawsuit settlement will be taxed is somewhat complicated. Generally, income is covered under the Internal Revenue Code (IRC) Section 61. According to IRC Section 61, unless a specific exemption exists, all income regardless of the source is considered gross income and is likely taxable. 

In most cases, it is necessary to look at the source or origin of the claim to determine whether the resulting settlement or judgment is taxable. If you are unsure whether the settlement you have already received is taxable, it is strongly recommended that you consult with a tax professional.

Are Personal Injury Lawsuit Settlements Taxed?

One of the main exemptions when it comes to lawsuit judgments and settlements is listed under IRC Section 104. Pursuant to this section, gross income does not include damages (except punitive damages) received on account of personal physical injuries or sickness. 

The exemption only applies to physical injuries. Damages related to emotional distress may be taxable if they did not arise from the physical injury. Furthermore, IRC Section 104(a)(2) specifically states that punitive damages are not included in the gross income exemption as they are treated separate and apart from compensatory damages in personal injury claims. 

Are There Ways to Minimize the Tax Consequences?

One way that you can minimize the tax consequences of a settlement or judgment is by allocating the award. You can establish a tax plan prior to accepting a settlement so that you fully understand what portion of your recovery is taxable and how it will impact the money that you receive. 

Tax laws change frequently and vary by state. It is essential that you obtain a full understanding of any tax consequences that your settlement may carry. If you do nothing and your settlement or judgment is taxable, the IRS may send you a 1099 to be filed as income on your tax return. Failure to report all income can result in serious penalties.

Contact Our Office to Discuss Your Claim

Were you injured due to another person’s negligence? If you are thinking of filing a personal injury lawsuit, we can help. 

At The Beasley Firm, we have over 60 years of experience representing injured parties throughout Philadelphia. We will walk you through the legal process, helping you to understand what to expect with your personal injury claim and settlement. Contact our office today at (215) 866-2424 for a free, no-obligation consultation.