Do I have to pay taxes on an out of court settlement?
If you are involved in a personal injury lawsuit and are considering a settlement, you may be curious about the potential tax implications. As a general rule, a case is taxed the same way regardless of whether it settles or gets a judgement in court. However, these settlements or judgments can be structured in a way to take advantage of certain tax laws.
Most settlements or judgments can be broken down into categories. For example, an agreement or judgment might have categories like emotional distress, lost wages, medical bills or attorney fees. The taxes due will ultimately depend on the type of damages or category that is being paid out.