Is a settlement taxable?

[AimLow]

What is the name of your state? TX
I may receive a settlement from a civil-litigation later this summer.
What are the major factors/considerations to know if the settlement is going to be taxable ?
(if there is a better forum/topic to post this, please let me know)
Regards.

 

[FlyingRon]

What is the name of your state? TX
I may receive a settlement from a civil-litigation later this summer.
What are the major factors/considerations to know if the settlement is going to be taxable ?
(if there is a better forum/topic to post this, please let me know)
Regards.

Depends on what the settlement is for. The answer in most cases is yes. The major exception is compensation for PHYSICAL (not emotional) injury or sickness. Settlement portions designated for medical payments to treat emotional distress are also excluded from income.

IRS Publication 17 pretty much lists the details (that's the famous "Your Federal Income Tax" document.

 

[AimLow]

Thanks. I have a Pub17 from a couple years ago, I'll see what it says for a start
and search the current one from the online-file...
It is not 'damage/medical compensation'. it is one of those "pay me to shut up" things.
I'm not happy about the "silence", but when I get my 'feelings' out of the issues,
I presume they got punished and I'm sorta compensated for my hassle.
Regards.

 

[LdiJ]

Thanks. I have a Pub17 from a couple years ago, I'll see what it says for a start
and search the current one from the online-file...
It is not 'damage/medical compensation'. it is one of those "pay me to shut up" things.
I'm not happy about the "silence", but when I get my 'feelings' out of the issues,
I presume they got punished and I'm sorta compensated for my hassle.
Regards.

I am going to define that a little differently than the previous poster did.

If the settlement is compensatory, for something that is normally not taxable, ie medical bills, physical injury, damage to property, or anything else that "makes you whole", or is designed to provide long term care then its not taxable.

If the settlement is compensatory, but for something that would normally be taxable (ie lost wages) its taxable.

If the settlement contains any punitive damages, those are taxable.

Therefore you may have a settlement that is partially taxable, partially non-taxable.

 

[XNavyLT]

When would you report the income? When you collect? or when the judgment was issued? IE: you collect a 10K judgment in 1K increments over 10 years...would that be 1K every tax year for 10 years?
Just curious...my wife has a yet to be collected judgment she just was awarded...She and I think it would be income AFTER you collect...

 

[abezon]

If you're a cash basis taxpayer (believe me you'd know if you weren't), you report the income when you receive it. Due to a recent change in tax law, you report the gross settlement amount as income, then deduct the attorney fees you never got as an adjustment to income. This is a significant improvement over the old treatment, where you deducted your attorney fees on Schedule A. Thus, the net amount included in AGI is what you received from your lawyer, not what the defendant paid out.

 

[tranquility]

My understanding is that S.B. 813 and S.B 814 (Bills which would allow for tax treatment as abezon describes.) have only been just introduced in March. I don't think either has passed as yet.

Certain Civil Rghts-type damages fall under such treatment due to a change a couple of years ago, but not basic tort-type damages as I supposed the OP was referring to.