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Tax Consequences of Lawsuits

Today is the day that millions of Americans rush to the post office in the grand tradition of filing taxes right at the April 15th deadline. The question often arises from clients as to what…

By The Legal Examiner
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Today is the day that millions of Americans rush to the post
office in the grand tradition of filing taxes right at the April 15th
deadline.  The question often arises from clients as to what their tax
liability is for a settlement or lawsuit victory.  Although the correct
way to deal with any questionable tax situations is to visit a qualified tax
professional or accountant.   This link has a good explanation of
what federal taxes one can expect to pay as a result of litigation.  The
law regarding damages obtained in a lawsuit or settlement changed in 1996 and
many of the changes have not been tested yet.  Anyhow, here is a chart
provided in that link, in case you don’t feel like clicking.

 

Taxable

Type of Recovery or Settlement

Yes

No

Punitive Damages:

Of All Types, Even If
Physical injury Is Involved

X

 

Special Wrongful Death
Circumstances

 

X

Compensatory
Damages For:

Emotional Distress (or any
other form of mental anguish)

X

 

Physical Manifestation of
Emotional Distress

X

 

Physical Injuries
Accompanied By Emotional Distress

 

X

Wrongful Death

 

X

Lost Services of Injured
Offspring

 

X

Serious Emotional Distress
Caused By Tortious Physical Contact Where There Is No Substantial Bodily
Injury

 

?

Lost Wages “On Account
Of” Physical Injury Or Sickness

 

X

Lost Consortium Due To
Spouse’s Physical Injury

 

X

Bystander Claims of
Negligent Infliction Of Emotional Distress

 

X

Lost Personal, Business, Or
Credit Reputation

X

 

Wrongful Discharge And
Other Common Law Employment Tort Theories Without Resulting Physical Injury
Or Sickness

X

 

Medical Expenses Incurred,
Including Those Expenses Attributable To Emotional Distress

 

X

Attorney’s Fees Associated
With Nontaxable Damages

 

X

Pre-Judgment and
Post-Judgment Interest

X

 

Interest Component of
Otherwise Nontaxable Structured Settlements

 

X

Interest Earned On Lump Sum
Judgments or Settlements

X

 
 STATUTORY
RECOVERIESMost of the principles on which the above
table is based also apply to the taxability of compensatory payments under
various statutes listed below:

 

Taxable

Type of Statutory Recovery

Yes

No

Survival

Worker’s Compensation
Benefits

 

X

Retaliatory Discharge
Claims/ Filing For Worker’s Compensation

X

 

Supplemental Disability
Benefits to Injured Police/Firemen

 

X

Teachers’ Sick Leave
Payments

 

X

Certain Claims For Injury
In Federal Government Active Service

 

X

Age Discrimination In
Employment Act (ADEA)

X

 

Scheme To Reduce Pension
Benefits Under ERISA

X

 

Discrimination Under Civil
Rights Act of 1866 (Section 1981)

X

 

Discrimination Under Title
VII of Civil Rights Act of 1964, as amended

X

 

Americans With Disabilities
Act of 1990, as amended

X

 

Fair Housing, Under Civil
Rights Act of 1968

X

 

Fair Labor Standards Act

X

 

Deprivation of
Constitutional Rights, Privileges Or Immunities

X

 

Equal Pay Act of 1963
(“EPA”)

X

 

Texas Commission on Human Rights Act of 1983

X

 

Source: http://www.mikejansen.com/tax.asp

The IRS also has very thorough literature available on its
website.

The Legal Examiner

The Legal Examiner

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