Kirsch Kohn Bridge CPAs + Advisors
  • About
    • Firm Overview
    • Our Team
    • International Affiliation
  • Services
    • Assurance and Accounting
    • Tax
    • Advisory Services
  • Industries
    • Construction
    • Manufacturing and Distribution
    • Not-For-Profits
    • Professional Services
    • Real Estate
    • Retail
    • Technology
  • Insights
  • Careers
  • Contact
  • Client Resources
  • Pay Online
  • Menu Menu
  • LinkedIn

How are Court Awards and Out-of-Court Settlements Taxed?

December 7th, 2021/Tax

Awards and settlements are routinely provided for a variety of reasons. For example, a person could receive compensatory and punitive damage payments for personal injury, discrimination or harassment. Some of this money is taxed by the federal government, and perhaps state governments. Hopefully, you’ll never need to know how payments for personal injuries are taxed. But here are the basic rules — just in case you or a loved one does need to understand them.

Under tax law, individuals are permitted to exclude from gross income damages that are received on account of a personal physical injury or a physical sickness. It doesn’t matter if the compensation is from a court-ordered award or an out-of-court settlement, and it makes no difference if it’s paid in a lump sum or installments.

Emotional distress

For purposes of this exclusion, emotional distress is not considered a physical injury or physical sickness. So, for example, an award under state law that’s meant to compensate for emotional distress caused by age discrimination or harassment would have to be included in gross income. However, if you require medical care for treatment of the consequences of emotional distress, then the amount of damages not exceeding those expenses would be excludable from gross income.

Punitive damages for any personal injury claim, whether or not physical, aren’t excludable from gross income unless awarded under certain state wrongful death statutes that provide for only punitive damages.

The law doesn’t consider back pay and liquidated damages received under the Age Discrimination in Employment Act (ADEA) to be paid in compensation for personal injuries. Thus, an award for back pay and liquidated damages under the ADEA must be included in gross income.

Attorney’s fees

You can’t deduct attorney’s fees incurred to collect a tax-free award or settlement for physical injury or sickness. However, to a limited extent, attorney’s fees (whether contingent or non-contingent) or court costs paid by, or on behalf of, a taxpayer in connection with an action involving a claim under the ADEA, are deductible from gross income to determine adjusted gross income. Specifically, the amount of this above-the-line deduction is limited to the amount includible in your gross income for the tax year on account of a judgment or settlement resulting from the ADEA claim, whether by suit or agreement, and whether as lump sum or periodic payments.

Best possible tax result

Keep in mind that while you want the best tax result possible from any settlement, lawsuit or discrimination action you’re considering, non-tax legal factors together with the tax factors will determine the amount of your after-tax recovery. Consult with your attorney as to the best way to proceed, and contact us so we can provide any tax guidance that you may need.

TAGS: Tax

Share This
  • Share on Facebook
  • Share on Twitter
  • Share on WhatsApp
  • Share on Pinterest
  • Share on LinkedIn
  • Share on Tumblr
  • Share on Vk
  • Share on Reddit
  • Share by Mail

Sign Up For Insights

This field is for validation purposes and should be left unchanged.

Categories

  • Advisory
  • Assurance
  • Tax

Archives

  • June 2022
  • May 2022
  • April 2022
  • March 2022
  • February 2022
  • January 2022
  • December 2021
  • November 2021
  • October 2021

Insights

2022 Q3 Tax Calendar: Key Deadlines for Businesses and Other Employers

June 27, 2022/0 Comments/in Tax/by LG-Admin

If you’re a business owner or executive, you might be taking it a little easy this summer. But don’t take it so easy that you forget about these third-quarter tax deadlines. Continue Reading 2022 Q3 Tax Calendar: Key Deadlines for Businesses and Other Employers

Read more
https://kkbcpa.com/wp-content/uploads/2022/06/Q3.jpg 292 560 LG-Admin https://kkbcpa.com/wp-content/uploads/2021/12/KKB-Logo-w-text.png LG-Admin2022-06-27 11:20:232022-06-28 11:20:402022 Q3 Tax Calendar: Key Deadlines for Businesses and Other Employers
Estate Tax

Your Estate Plan: Don’t Forget About Income Tax Planning

June 15, 2022/0 Comments/in Tax/by LG-Admin

With the federal estate tax exemption currently so large, you may want to devote more time to saving income taxes for your heirs. Continue Reading Your Estate Plan: Don’t Forget About Income Tax Planning

Read more
https://kkbcpa.com/wp-content/uploads/2022/06/Estate-Tax.jpg 292 560 LG-Admin https://kkbcpa.com/wp-content/uploads/2021/12/KKB-Logo-w-text.png LG-Admin2022-06-15 11:20:242022-06-15 11:27:31Your Estate Plan: Don’t Forget About Income Tax Planning

Contingent Liabilities: To Report or Not to Report?

May 31, 2022/0 Comments/in Advisory/by LG-Admin

Is your company being transparent about contingent liabilities? In today’s uncertain conditions, reporting contingencies can be challenging. Here’s a refresher on the accounting rules for disclosing and estimating expected losses. Continue Reading Contingent Liabilities: To Report or Not to Report?

Read more
https://kkbcpa.com/wp-content/uploads/2022/05/Contingent-liabilities.jpg 292 560 LG-Admin https://kkbcpa.com/wp-content/uploads/2021/12/KKB-Logo-w-text.png LG-Admin2022-05-31 13:34:032022-06-15 11:17:12Contingent Liabilities: To Report or Not to Report?

Your Estate Plan: Don’t Forget About Income Tax Planning

June 15, 2022/0 Comments/in Tax/by LG-Admin
Read more
https://kkbcpa.com/wp-content/uploads/2022/06/Estate-Tax.jpg 292 560 LG-Admin https://kkbcpa.com/wp-content/uploads/2021/12/KKB-Logo-w-text.png LG-Admin2022-06-15 11:20:242022-06-15 11:27:31Your Estate Plan: Don’t Forget About Income Tax Planning

Contingent Liabilities: To Report or Not to Report?

May 31, 2022/0 Comments/in Advisory/by LG-Admin
Read more
https://kkbcpa.com/wp-content/uploads/2022/05/Contingent-liabilities.jpg 292 560 LG-Admin https://kkbcpa.com/wp-content/uploads/2021/12/KKB-Logo-w-text.png LG-Admin2022-05-31 13:34:032022-06-15 11:17:12Contingent Liabilities: To Report or Not to Report?

CalSavers Deadline is Approaching for California Employers

May 26, 2022/0 Comments/in Tax/by LG-Admin
Read more
https://kkbcpa.com/wp-content/uploads/2022/05/Calsaver-e1653595863650.png 315 560 LG-Admin https://kkbcpa.com/wp-content/uploads/2021/12/KKB-Logo-w-text.png LG-Admin2022-05-26 15:09:202022-06-15 11:17:06CalSavers Deadline is Approaching for California Employers
View All

Sign up for insights

This field is for validation purposes and should be left unchanged.
KKB alternate logo

Kirsch Kohn & Bridge LLP

Phone: 818-907-6500
Fax: 818-783-0725
21800 Oxnard St., Suite 900
Woodland Hills, CA 91367
info@kkbcpa.com

Firm Overview
Our Team
International Affiliation
Contact
Careers

Sign up for our newsletter
Client Resources
Pay Online

© 2022 Kirsch Kohn & Bridge LLP. All rights reserved. Privacy Policy

The Tax Implications of Owning a Corporate Aircraftbusiness travelRolling Forecasts Provide Flexibility in Uncertain Times
Scroll to top