Obtaining the judgment money from a suit can feel like the conclusion of a long process. The IRS, however, could want a portion of that judgment. Resource for this article: IRS may require you to pay taxes on legal judgments
Knowing which are taxable
Determining what is taxable and what is not taxable could be hard to do. Luckily, the Internal Revenue Service has it all figured out for legal judgments. Any payouts related to lost wages or punitive damages from a physical injury are taxable. The payouts for the injury, paying the hospital bills, etc., are not taxable. Any emotional stress is taxable. Only physical injuries get the exemption.
How judgment income is taxed
If you are trying to figure out your tax forms with the judgments, you may have to consult a professional. They will know all the laws and make sure you have the right info. The “other income” section on tax forms will include every judgment except ones made for lost wages or ones for physical injuries. Anything reported for lost income will go under the “wages” section.
Choosing to settle
Even though a settlement could be a great way to help you save extra cash, make sure you first understand the consequences. The IRS does not have to follow what a settlement states, although it is good for arguing your case. Talk to your attorney and accountant to make sure you will not have any issues in the future. If you choose to do a settlement, word it so that the cash is going towards a physical injury or ailment. That way, you can use it to get your cash tax-free.
Sources
Foreclosure Law Firms
PrairieLaw
IRS
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