In a lawsuit settlement, the plaintiff can often be awarded for both compensatory and punitive damages. Punitive damages can be seen as a “punishment” of sorts to the defendant in the lawsuit, as a way for the Courts to assign a dollar amount to a perceived wrongdoing towards the plaintiff.
While compensatory damages are not taxable, punitive damages certainly are. More importantly, the plaintiff is taxed on the entire dollar amount of the punitive damage award—that’s before legal fees are taken out of the total.
So, for instance, a plaintiff receives a $100,000 settlement, yet incurs $30,000 in legal fees. They are still taxed on the entire $100K, not the reduced $70K net. That’s an important point to consider when preparing a lawsuit settlement tax calculator—and a factor every potential plaintiff should weigh before deciding to pursue a lawsuit.
For a better understanding of lawsuit settlement taxation, read this: The Tax Ramifications of the Trump Tax Law on Personal Injury Settlements
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