Do you pay tax on winning settlement in a lawsuit involving benefits vs lost wages?

Answer 1

This depends on what the settlement consist of. Any part of the settlement that is reimbursement for medical expenses or pain and suffering is not taxable. If part of the settlement consists of reimbursement for lost wages, that is taxable. That is because, had you received those wages back then, you would have had to pay taxes on them. It is basically taxable money that you didn't get till after you should have.

Answer 2

Generally, a legal settlement or court award is not taxed if it was for personal injury or damages due to an illness. Any interest on the award is taxable and should be reported. Other types of awards and settlements are taxable such as for breach of contract, lost wages or profits, punitive damages, employment discrimination, emotional distress, etc.

Answer 3

It depends on what the lawsuit payment is for. Generally, if it is paying you for the loss of property, no. If it paying you for the loss earnings (or as a penalty to the one paying it) then it's taxable to you. (The income would have been taxed had you not had to sue).

Answer 4

Yes. Also if you have had earnings over a period of time the lost wages tax will be secondary

The way your Q is worded makes exactly what you are asking difficult - but as a general rule - if what you are getting paid by lawsuit for would have been taxable income had you not had to sue, it is still taxable income. Hence, it is even possible that your award will be taxable as wages (with FICA, UI, etc. requirements) and a portion as interest income. Other catagories of it - like repay of attorney/court cost or punitive can be tricky and may depend on how they are handled. You really should discuss with your lawyer how it is being structured and what the effect will be.