Is My Settlement Taxable? Understanding Tax Implications of Legal Awards
When considering any settlement, clients often ask us if the money they receive will be taxable. In general, income from settlements, awards, and lawsuits is taxable unless it meets specific exclusions in Internal Revenue Code Section 104. Here are a few general rules that apply to common types of cases that N.P. Weiss Law handles:
Actual or compensatory damages are generally are not taxable. These damages are monetary awards intended to make a party whole for losses or injuries sustained due to another party’s negligence or wrongful conduct. This includes cost of repairs for damage or destroyed property or other out of pocket expenses (such as the cost to repair work done by a bad contractor).
Punitive damages are always taxable. Punitive damages are awarded to punish a defendant for malicious, fraudulent or willful conduct that exceeds legal criteria for gross or mere negligence. For example, treble damages awarded in a Consumer Sales Practices Act case are taxable.
Interest received on a judgment or pursuant to a settlement is always taxable.
In divorce cases, property settlements between spouses are generally considered nontaxable events. Alimony and child support payments are not considered income for the recipient, nor are they tax-deductible for the payer.
If you have questions or concerns about tax implications of a settlement or other monetary award, it is a good idea to bring that up with your attorney, and consult a tax professional prior to entering into any agreement. In addition, you should always consult a tax professional to ensure that any income derived from a settlement or pursuant to a court order is properly accounted for in your tax filings.
This blog was drafted by Rachel Kuhn, an experienced attorney at N.P. Weiss Law who specializes in Real Estate Law. For more information about Rachel, you can visit her bio page.
If you are seeking legal assistance regarding a settlement you can contact N.P. Weiss to schedule a consultation.
This article is meant to be utilized as a general guideline. Nothing in this blog is intended to create an attorney-client relationship or to provide legal advice on which you should rely without talking to your own retained attorney first. If you have questions about your particular legal situation, you should contact a legal professional.