A monetary settlement award resulting from a lawsuit, personal injury or otherwise, does potentially contain taxable elements.
It’s not a simple yes or no answer though. Let’s start easy: punitive damages (cash awarded to plaintiff as “punishment” for the defendant) certainly are taxable.
In a personal injury case, compensatory damages (resulting from an injury) weren’t historically taxed—yet changes to tax laws now dictate that compensatory damages must be linked to a physical injury in order to remain tax free. Compensatory damages related to emotional trauma may now qualify for taxation.
Here's a good breakdown on the nuances behind some of those personal injury settlement tax law changes: The Tax Ramifications of the Trump Tax Law on Personal Injury Settlements
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