Would I pay tax on a law suit settlement?

Question

I sued my abuser, who molested me and who was convicted to 8 yrs in jail for damages, (i believed it was punitive but also for me to get money to get therapy, I saw a therapist to get the judgement) and was awarded part of my the overall settlement, now myself personally would definately not feel the gov't has any right to touch this money since it was to repair my deep suffering, but since the gov't is heartless, i need input, i just wanted some of your thoughts b4 i hear back from my lawyer (he should know)
and if i do have to pay tax on this money, would it be treated as real income? that case i would lose most of it :(
thanks

Answer 1

The rules on this are pretty specific. Settlements for physical injury or illness are not taxed. All others are fully taxable. Amounts earmarked for interest, punitive damages and lost wages are fully taxable even if the base settlement is not.

Payments for emotional distress may or may not be taxable. Here's what IRS Pub 525 says on the matter:

"Emotional distress. Emotional distress itself is not a physical injury or physical sickness, but damages you receive for emotional distress due to a physical injury or sickness are treated as received for the physical injury or sickness. Do not include them in your income."

If the abuse included a physical injury to you, compensation is non-taxable. If it did not include a physical injury then it's fully taxable although the portion that was used to pay for medical treatment of the stress is not taxed. (Rape clearly involves physical injury. If the abuse included rape, the compensation is not taxable.)

With a complex case such as this, I'd strongly recommend a consultation with a CPA or tax attorney. The attorney who worked your case for you may not be qualified to answer this question properly.

Answer 2

It will depend on how the settlement documents were written. A judgement for physical injuries are not taxable, all other settlements would be. I would contact your attorney or a good CPA to help you determine how to handle this matter.

Answer 3

usually the proceeds of a lawsuit are no longer taxable besides the undeniable fact that there ought to be cases the place the money could be taxable and it relatively is maximum suitable to confirm with an accountant or different tax expert. working example, If the lawsuit replaced into for inner maximum harm - the award isn't taxable. If the lawsuit replaced into to get well wages (say her company did no longer supply her final paycheck to her) or different money that could routinely be taxable, then the money could be taxable income.

Answer 4

Sometimes rewards have more than one component. Unfortunately, there is no cut-and-dried formula for determining whether your particular awards will be taxable. Read here to see what I mean: http://www.allbusiness.com/legal/litigation/127722-1.html

In general, only compensatory damages from non-physical injury are non-taxable. Punitive damages are taxable. In the case of physical injury, both components may be taxable.

It must be noted that the facts and premises in each case is different and may be treated differently for tax purposes. Depending on the amount of your reward and your expectations of its collectibility, it may be cheaper to pay the taxes than to fight the IRS in court.

Answer 5

Compensatory damages are not taxable. Punitive damages are. Your settlement should be written so that most of the damages are to compensate you for therapy, lost wages, etc.

Answer 6

The government will tax almost any cash they can get their hands on. Try calling the IRS if the lawyer doesn't know for sure. You don't want to spend the money and *then* get stuck with a tax notice.