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How Much Tax Is Paid on Lawsuit Settlements?

Filing a lawsuit can be a long and complicated ordeal, and the settlement process can be confusing, especially when it comes to taxes. You’ll want to understand how much of your settlement will go to taxes and what you can do to minimize the amount of taxes you owe.

In this post, we’re going to explore the different types of settlements as well as how they are taxed.

Types of Lawsuit Settlements

Settlements can be reached in many different types of civil lawsuits. Some types of cases where a person may receive a settlement include:

  • Personal injury settlements
  • Discrimination settlements
  • Employment-related settlements
  • Wrongful death settlements

Different types of settlements can have different tax implications, so you’ll want to understand the specifics of each one.

Personal Injury Settlements

Personal injury settlements may include awards for physical injury and emotional distress. Awards for physical injury are not taxable, and awards for emotional distress are not taxable unless they are unrelated to physical injury.

You should keep in mind, though, that certain parts of your settlement may be taxable. This could include emotional distress that is unconnected to physical injury and punitive damages you may have received. Awards for medical expenses aren’t taxable unless you already deducted them from last year’s taxes.

Employment Discrimination Settlements

Employment discrimination settlements are typically taxable. This includes settlements for discrimination based on age, race, gender, or disability. Discrimination is likely to create claims of emotional distress for clients rather than physical injury. If physical injuries didn’t cause the emotional distress, they are taxable.

Employment-Related Settlements

In a case where a former employee receives an award for lost income as part of their settlement, the award is subject to tax. The only exception would be if the employee suffered physical harm in connection to their claim. Business income and benefits from the former job would also be taxed.

Wrongful Death Settlements

Wrongful death settlements are typically not taxable, although portions of them could be, depending on what they compensate for. Since wrongful death lawsuits tend to result from claims of personal injury or physical illness, this portion of the award would not be taxable.

Minimizing Tax Liability

While it may not be possible to avoid paying taxes on parts of your settlement, there are steps you can take to lessen the amount of taxes you owe. Here are some tips to help you minimize your tax liability:

  • Consult a Tax Professional – Before accepting a settlement, you should consult with a tax professional. They can help you understand the tax implications of your settlement and advise you on the best way to minimize your tax liability.
  • Negotiate to allocate damages – If possible, allocate more of the damages to the physical injury award, which is not subject to tax.
  • Consider a Structured Settlement – A structured settlement is a settlement where the payments come in installments instead of in a lump sum. This can help you minimize your tax liability by spreading the payments out over a longer time.
  • Contribute to a Retirement Account – If you receive a large settlement, you may want to consider contributing some of the money to a retirement account, such as an IRA or 401(k). This can help you reduce your taxable income and minimize your tax liability.
  • Donate to Charity – If you receive a settlement, you may want to consider donating some of the money to charity. Donations to qualified charitable organizations are tax-deductible, which can help you reduce your taxable income and minimize your tax liability.

Our Settlement Lawyers Can Help

Lawsuit settlements can be complicated and confusing, especially when it comes to filing taxes. It is helpful to understand the different types of settlements and how they’re taxed so that you can minimize your tax liability.

If you have any questions or concerns about the tax implications of your settlement, it’s best to consult with a settlement lawyer or a tax professional. With your attorney’s guidance and planning, you can ensure that you’re paying the minimum amount of taxes on your settlement and keeping more of your hard-won money.

Here at Veron Bice, LLC, our settlement lawyers have years of experience navigating lawsuit settlements and the tax implications of those settlements. We fight hard to seek a high settlement amount for our clients and minimize their tax liability. If you need help with your lawsuit settlement, our team is standing by. Get your free consultation today by calling us at 337-310-1600.

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