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In a discrimination case would compensatory damages be considered taxable? If my attorney does not know how to...

Morris Plains, NJ |

structure a settlement so there is no tax consequences should I hire a tax attorney or an accountant or both?

Attorney Answers 3


Your employment itigator should know whether or not litigation proceeds are taxable, and generally the IRS is strict about classifying almost all income as taxable. An exception is money received for personal injuries, which isn't taxable, Generally employment litigation involving discrimination doesn't involve what the IRS considers a personal, physical, medical, injury. See your own CPA for help.

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Martin L Bearg

Martin L Bearg


While in general Ms. Koslyn is correct that the proceeds of an employment case are taxable, the IRS has created a cut-out in discrimination/whistleblower cases. The judgment, including compensatory and punitive damages are taxable. The award for legal fees are taxable to the attorneys representing you and not to you. If the recovery for is unjust termination, but not related to a discrimination claim, the full award is taxable to you, but you are entitled to a deduction for the expenses and legal fees paid on Sch A as an itemized deduction.


Unless your lawyers is also an accountant and specializes in Tax Law, you should always consult your accountant for these types of answers. To help, you can always look at the IRS code, and specifically, review the section IRC Section 104(a)(2) and look at the IRS memorandum PMTA 2009-35, entiled "Income and Employment Tax Consenquences and Proper Reporting of Employment Related Judgments and Settlements."

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Generally you won't be able to structure a settlement so there are no tax consequences in a discrimination suit; assuming this is employment discrimination, the damages are a replacement for foregone income and are thus treated for tax purposes as if they were ordinary taxable income.

That being said, a settlement can be structured to reduce the amount of tax that you will owe on the amount of the settlement. If your employment lawyer doesn't have the expertise to structure that settlement for you then you should absolutely retain a competent tax professional to advise you and your attorney on structuring your settlement.

My answer does not constitute legal advice and may not be relied upon by anyone for any purpose and does not constitute an attorney/client relationship or an offer to form such a relationship. This disclaimer is intended to be fully compliant with the requirements of Treasury Department Circular 230 and the terms thereof are fully incorporated by reference. If you wish to consult with me please contact me at dwatchley@newyorktaxcounsel or visit my website at

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