Tax time: my least favorite time of year. But until we repeal the 16th Amendment, we have to deal with the IRS. Jury verdicts and settlements can bring financial compensation for damages suffered. However, it’s essential to grasp the tax nuances associated with these awards to make informed decisions. Your dedicated attorney in Alexandria is here to shed light on this complex topic.

The Basics of Taxation on Legal Damages

With any tax issue, start with asking “Is the money part of my gross income?” If it is, it is taxed. If it is excluded from gross income, it is not taxed.

Things generally excluded from gross income include life insurance benefits, educational scholarships, and inheritances. These exclusions have in common a policy of encouraging family wealth transfer, educational advancement, and compensation for loss.

Similarly, compensatory damages for personal physical injury or physical sickness are excluded from gross income. Compensatory damages for personal physical injuries are viewed as a form of recovery. Taxing these damages could be seen as imposing an unwarranted burden on individuals who are already dealing with the physical, emotional, and financial consequences of an injury. If only the IRS was always so compassionate.

Of course, it is not. Compensation for non-physical injury (e.g., emotional distress without a physical injury), punitive damages, and damages received for economic loss, lost profits, and breach of contract are included in gross income and taxed.

Your attorney in Alexandria will guide you through the specifics of qualifying for the gross income exception and help structure your case to maximize the tax benefits.

Structuring Settlements for Tax Efficiency

Collaborating closely with your attorney in Alexandria during your case can provide opportunities to structure your legal award in a tax-efficient manner. By carefully allocating damages into different categories, you may mitigate the overall tax impact. Your attorney will work to safeguard your financial interests while keeping tax consequences in mind.

The Internal Revenue Code states that the amount of any damages (other than punitive damages) received “on account of personal physical injuries or physical sickness” are tax free. Damages awarded in a wrongful death case that arose from a physical injury of some sort (e.g., failure to properly treat an infection) would all be tax free, even if some of the damages were for claims of emotional distress. The same would be true for emotional distress damages stemming from a sexual assault because the assault is a physical injury. However, emotional distress damages awarded in a discrimination case are taxed because discrimination is not a physical injury.

Seeking Professional Guidance

Navigating the taxation of legal damages requires expertise in both legal and financial matters. Your trusted attorney in Alexandria is not only well-versed in the local legal landscape but also knowledgeable about the intricacies damages awards. With his guidance, you can make informed decisions that align with your financial goals and priorities.

Connect with Your Attorney in Alexandria Today

For personalized advice on this issue and comprehensive legal representation, reach out to our experienced lawyer in Alexandria. We are committed to safeguarding your rights, ensuring you receive the compensation you deserve, and minimizing the tax impact on your financial recovery.

Take the first step toward informed legal decisions – schedule a consultation with your dedicated attorney in Alexandria today.