Taxes, Lawyers, Business & Debt
Taxes on Lawsuit Settlements
You may think that all lawsuit settlements are taxable, but some are not. To figure out if your settlement or judgment amount should be included in your income, you must first determine what it is that the settlement is replacing. There are certain things that should be considered as part of a person's income, such as:
- The interest that an award amount produces
- Reimbursement for lost profits or wages
- Punitive damages, whether they result from a physical illness or injury
- Pension rights settlement (if the person didn't contribute to the pension plan)
- Damages gained for copyright or patent infringement, interference with a business' operations, or breach of contract
- Damages received in an emotional distress case, or back pay
- Lawyer costs and fees (such as contingency fees) where the recovery in question is part of a person's gross income
There are certain settlements that should be excluded from in come, such as compensation for physical injury or sickness- whether in installments or a lump sum. Emotional distress isn't a sickness, but can include physical symptoms such as insomnia, stomach trouble or headaches. Damages received in a physical injury or sickness case that caused the emotional distress are considered to be paid for the injury or illness. If there has been injury to your reputation or discrimination against you, those damages must be taxed.
Your court costs and attorney fees may be deductible, if they were paid in the recovery for unlawful discrimination under local, state or federal law. Also deductible are claims against the US government, or a claim under the Social Security Act. The deduction can be claimed by adjusting the amount on line 36 of Form 1040. The court costs and attorney fees can be paid on your behalf, or by you personally. Your deduction can't be higher than the judgment amount, and it must have happened after October 22, 2004.