Do you have to pay taxes on a lawsuit you were awarded?

Answer 1

My husband received part of a settlement from a lawsuit. The rst to follow. Does he need to declare the money and pay taxes on it? Have heard both pro and cons concerning this. And since tax time is coming up, we would like to know how we are to deal with this.

Answer 2

That depends on the type of lawsuit. Generally, if the lawsuit is for damages that compensates you for some kind of loss, whether personal' like bodily injury, or economic, like loss of some asset, there is no income tax liability. This is because that money is not income; it is a replacement of something that should have existed but was lost due to some wrongful action by another person. On the other hand, a lawsuit to recover something like lost wages under a wrongful termination lawsuit would be taxable. That is because those proceeds represent money that would have been subject to taxes anyway. Also, even if the lawsuit is to recover a lost asset, more than likely, the damages will include interest on the asset from the time you lost it. That income is considered a separate part of the recovery and is subject to income taxes, again, because that money would have been taxed as it was earned.

Answer 3

It depends on what the payments are really for. Damages received for personal physical injury or physical sickness are generally NOT taxable. If it is to replace something you actually lost, like an arm, or eyesight, etc...then it isn't taxable. If it is to replace income that you would have made, then it IS taxable (just like the income would have been).

Punitive damages ARE taxable. Damages for emotional distress ARE taxable except for amounts that were used to pay for actual medical expenses (but obviously, those espenses them can't be used as a deduction in your return).

Answer 4

If by "payroll lawsuit" you mean a lawsuit for back pay that you were entitled to but did not get, then yes you do have to pay taxes on it. This is because that money is a replacement for the income you should and would have received earlier but did not get. Had you gotten it earlier, you would have had to pay taxes on it as taxable income at that time.

Answer 5

It gets a bit complex, and very dependent on how the offical judgment was worded ..in simple form:

Payments for replacement of things...like damage/loss to your car or property, are NOT taxable (at least as long as you DIDN'T claim a casualty/theft/etc tax loss on them already). It just restores you to where you were. (Generally, that includes the loss of a limb, or such).

A payment for loss of wages (which is at least in part because they would have been taxable had they been received normally), or to compensate you for future losses, or punish the others (punitive), are taxable.

Answer 6

This would depend on the type of Injury payout the above question is about you could have some taxable amount and some nontaxable amounts involved in the payout amount.

The items below would be added to all of your gross worldwide income and taxed as ordinary income at your marginal tax rate.

• Interest on any award
• Compensation for lost wages or lost profits in most cases
• Punitive damages.

Don't include in your income compensatory damages for personal physical injury or physical sickness (whether received in a lump sum or installments).

Damages for emotional distress are taxable unless they are due to a physical injury or sickness.

Amounts you receive as workers' compensation for an occupational sickness or injury are fully exempt from tax if they are paid under a workers' compensation act or a statute in the nature of a workers' compensation act. The exemption also applies to your survivors. The exemption, however, does not apply to retirement plan benefits you receive based on your age, length of service, or prior contributions to the plan, even if you retired because of an occupational sickness or injury.

If part of your workers' compensation reduces your social security or equivalent railroad retirement benefits received, that part is considered social security (or equivalent railroad retirement) benefits and may be taxable. For a discussion of the taxability of these benefits, see Other Income under Miscellaneous Income, later.

Go to the IRS gov web site and use the search box for Publication 525 Taxable and Nontaxable income

Answer 7

"http://wiki.answers.com/Q/Do_you_have_to_pay_taxes_on_your_court_settlement"

Answer 8

A class action lawyer will be better able to answer that. You can join of start a Class Action on http://www.SueEasy.com Great resource. Huge Database.

Answer 9

Yes or no