Is settlement money taxable? There are several factors to consider when calculating taxable compensation. Depending on the type of award you received, your settlement might be taxable. For example, you might not have to pay taxes on compensatory damages for emotional distress - but if you received money for physical injury, these damages are likely taxable. Punitive damages, on the other hand, are taxable. You may also have to pay taxes on lost wages and interest. Attorney fees are also considered part of the award, which means that you may end up owing the IRS 100% of your award.
You should also pay special attention to settlement interest, which is the interest you accrued on an unpaid settlement. Interest on settlements is usually taxed, but there are two types: pre-judgment interest, which accrues between the time of injury and the date of the judgment, and post-judgment interest, which accrued between the judgment date and the settlement date. Whether the interest is taxable or not is a matter of fact, so be sure to consult an accountant for more information.
When determining whether settlement money is taxable, you must determine the nature of the claim and its character. For example, is the money a wage or salary? Is it subject to employment taxes? If so, how much must be reported? This can be a complicated process, but if you can properly document your settlement payments, the IRS will look favorably on your return. In any event, you should file Forms 1099-MISC with the plaintiff and attorney.
Another factor that influences whether or not your settlement money is taxable is whether the damage was visible to the public. Generally speaking, settlement money resulting from an injury that has been visible to the public will not be taxable. In such cases, you should consult a tax accountant. Otherwise, you could end up with a bill that is worth more than the settlement itself. It's important to understand the tax implications of settlements before you receive a lump sum of money.
In general, emotional distress is a taxable event. While physical injuries are generally not tax-deductible, emotional distress may be. Whether or not an emotional distress settlement is taxable depends on the nature of the case. Before 1996, emotional distress settlements were tax-free. Only physical injuries and illnesses were exempt. But a new law makes it clear that compensation for emotional distress is taxable. In some circumstances, however, it depends on the nature of the injury.
A wrongful death lawsuit may result in a settlement worth millions of dollars. While this amount may seem large, it is purely compensatory, and does not include punitive damages. The IRS applies a standard under which the Internal Revenue Service treats these payments. If your loved one was killed in a collision resulting in a $10 million settlement, the money will be exempt. It's a win-win situation for everyone.