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Are Lawsuit or Accident Settlements Taxable?

Settlements to compensate you for physical injuries or sickness suffered in an accident are tax-free. So is the amount paid to compensate you for loss of your car, or medical expenses, except to the extent that those expenses were deducted in an earlier year and provided a tax benefit. Punitive damages awarded in a lawsuit, and any damages award for non-physical injuries, are generally taxable. Your legal expenses in obtaining a judgment in your favor can be deducted only in the same proportion as the resulting damages are taxable to you. For example, if your attorney won damages for your physical injury that were 80% compensatory (not taxable) and 20% punitive (taxable), only 20% of the fee paid to him can be claimed as a miscellaneous itemized deduction, subject to the 2% of AGI  (Adjusted Gross Income) limitation.




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We do not offer legal advice. All information provided on this website is for informational purposes only and is not a substitute for proper legal advice. If you have legal questions, we recommend that you seek the advice of legal professionals.

Tax Disclaimer: To ensure compliance with IRS Rules, any U.S. federal tax advice provided in this communication is not intended or written to be used, and it cannot be used by the recipient or any other taxpayer (i) for the purpose of avoiding tax penalties that may be imposed on the recipient or any other taxpayer under the Internal Revenue Code, or (ii) in promoting, marketing or recommending to another party a partnership or other entity, investment plan, arrangement or other transaction addressed herein.

Copyright 2017 Wink Tax Services / Wink Inc.
Last modified: January 30, 2017