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Is the money from a settlement taxable?

Sacramento, CA |

I wanted to know do I have to report income from a settlement and pay taxes on it?

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Attorney answers 4


If your talking about a settlement from a lawsuit or a legal claim, it is taxable unless it is from a suit or settlement "on account of personal physical injuries or physical sickness" You should consult with a tax attorney to get an opinion on whether your settlement or part of it qualifies for tax free treatment.


It depends on what type of settlement it is and what kind of case. Consult with a tax attorney in your area. Impossible to say without more information.

This response does not constitute legal advice and does not create an attorney-client relationship. Legal problems and solutions depend on their unique facts. Due to the complexity and ever-changing nature of the law and to the limitations of this forum, this information may not be complete or adequate for your specific situation. Laws and regulations often differ from one jurisdiction to another. Mark E. Barbour practices in the State of Ohio.


The issue of how a settlement is taxed is, unfortunately, complicated. If the proceeds are from an employment case, they are ordinary income. If the proceeds are from the loss of an asset, then they are capital gain. If the proceeds are from the loss of an arm, the proceeds are not taxable. So to advise you the lawyer must read the complaint, the response and the settlement agreement.


As the other attorneys mentioned, the taxability of settlements is a complicated question. In general, if you receive a settlement for personal physical injuries or sickness, the full amount is non-taxable. However, if you deducted medical expenses related to the injury or sickness in prior years, then you must claim the settlement proceeds to the extent you received a tax benefit for those prior deductions. Settlements for loss of value in property may not be taxable, but will affect your capital gains taxes in the future and, therefore, must be properly accounted for. Settlement proceeds to compensate for business or employment related losses are generally taxable. In each situation, there are nuances to consider and you should seek the aid of a qualified attorney and CPA.

This response does not create an attorney-client relationship, nor does it constitute legal advice, it is for general information only. The answers to legal questions depend on the specific facts and circumstances of your situation.

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