Skip to content

Taxability of Legal court Awards and Settlements

Legal issues for businesses can often end in either a settlement or money awarded to a company or the person filing the lawsuit. You can also get money awarded to an individual in connection with a personal injury lawsuit. For tax purposes, there are specific rules when it comes to the treatment of that income (when is it taxable and when is it tax-free) and expenses (when are they deductible or not) that go along with the lawsuit.

Taxability

In the case of personal injury lawsuits, some of the money could be considered as taxable income. Proceeds received related to physical injury or physical sickness are not considered taxable income. Any compensation related to emotional distress or punitive damages needs to be included in Income. Exception: when you receive medical care for emotional distress, only the settlement proceeds above and beyond those medical expenses is considered income to the individual.

Expenses

The associated attorney’s fees are generally not deductible as an expense when you get a tax-free income from a settlement. However, if the lawsuit pertains to age discrimination such that the proceeds are taxable income, you can deduct those fees from gross income to determine adjusted gross income. Specifically, the amount of this “above-the-line deduction” is limited to the lawsuit settlement amount included in your gross income.

If you are involved in a lawsuit where you may be entitled to settlement proceeds, the overall tax treatment to the payee should be considered by you and your legal team as this may impact the negotiation of the settlement terms and ultimate payout. Please contact your Wegner professional for more information to help minimize the tax cost.

Would you like to learn more?

Join our email list to receive our most recent blog posts, notification of upcoming seminars, and access to new resources!

Stay Connected
More Updates

Fraud Prevention for Small Business

Unfortunately for many small businesses, the “F” word has become increasingly common.  It’s a word that’s painful to hear, and a word that should definitely be avoided in a respectable

Estate Planning and Income Tax: Have a Plan

As of 2022, the current estate tax exemption is $12.06 million, allowing many to disregard concerns with federal estate tax. Compared to a decade ago, when planning was focused on