Apr 15, 2008 | 2 min read

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 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 l ink 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
RECOVERIES

Most 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

Wooten Kimbrough Damaso & Dennis, P.A.
(407) 843-7060

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