Do you pay taxes on the settlement monies from a civil suit (workplace physical & mental harrassment)?

Question

Also wondering-is it dispersed through a trust? If it is taxed do they send that off or do you pay taxes when you recieve your "cut"? Is it taxed like regular income? This is a whole new language for us and its been a long ride the last couple years-hopefully we are almost to the end but didn't know how it works....THANX!

PS-We live in California

Answer 1

March 7, 2003
Pryce Introduces Civil Rights Tax Relief Act

Washington, D.C. – House Republican Conference Chairman Deborah Pryce (R-OH-15) yesterday introduced the Civil Rights Tax Relief Act, which will eliminate unwarranted and onerous taxation of victims’ settlements and court awards in cases such as discrimination based on race, sex, age or disability.

“The Civil Rights Tax Relief Act will reform provisions of the tax code that treat civil rights victims unfairly,” Pryce said. “Certain tax provisions amount to little more than government-inflicted insult added to a civil rights victims’ injuries and serve as a government-erected barrier to just settlements of civil rights claims.”

Emotional distress awards for discrimination are taxable under current law, including awards for medical bills associated with emotional distress. While the tax code recognizes that some emotional distress awards should not be taxed, it discriminates against emotional distress awards that are not caused by a physical act, but which may be every bit as debilitating.

The Civil Rights Tax Relief Act eliminates the taxation of non-physical injury damage awards of discrimination victims.

In addition, under current law, employment discrimination victims’ awards for lost pay often push victims into higher tax brackets than they would have been in had they received pay on time from their employers. The Civil Rights Tax Relief Act allows the back-pay award to be averaged over the period of time it is designed to compensate victims, so that lump sum awards do not place them in a higher tax bracket.

“If the IRS takes less in taxes from civil rights plaintiffs’ settlements, it will be easier for both civil rights plaintiffs and defendant businesses to reach just settlements without the need for protracted trials requiring significant investment of resources,” Pryce said. “This legislation offers a ‘win-win’ solution for both civil rights plaintiffs and defendant businesses.”

Answer 2

Settlements for physical injury or illness are not taxed. Unless your situation involved physical injury -- no matter how slight -- it would be fully taxable.

Even if the basic settlement is not taxable, if any portion is earmarked for lost wages, interest, or punitive damages, those amounts are fully taxable.