When you receive a settlement from a lawsuit, it's important to understand the tax implications. Generally, settlement money and damages collected in a lawsuit are considered income, which means that the IRS will tax that money. However, there are some exceptions. Accident and personal injury cases, such as a slip and fall or workers' compensation case, are excluded from taxation.
Punitive damages, which are intended to punish the accused, are almost always taxable. The decisive factor is whether your agreement involves personal injury in which there is “observable bodily harm.” If your settlement was for a personal injury lawsuit where your injuries could be visible, your settlement may not be considered income and you will not have to include this agreement when filing your income tax forms. Most settlements are for various types of damages, such as loss of income, emotional distress, medical expenses, and other costs. It's wise to set aside part of your agreement to cover the tax bill.
If you have received or expect to receive a large settlement, it is important to understand the financial impact following receipt of settlement funds. Winnings from a personal injury settlement are often not taxed at all, but there are some exceptions. If you have sued for damage to your home or commercial factory, you may be able to classify the settlement as capital gains. In the fiscal year you receive your settlement, it might be a good idea to hire a tax accountant, even if you normally do your taxes yourself online.
If you plan to issue one, negotiate 1099 revenues to be a lower number than your actual settlement amount. Defendants who issue a settlement payment or insurance companies that issue a settlement payment must issue a Form 1099, unless the settlement qualifies for one of the tax exceptions.
