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Ed Johnson
Ed Johnson, Tax Preparer
Category: Tax
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Experience:  GPHR Cert; U.S. Treasury Tax Advocacy Panel appointee
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are legal malpractice awards taxable

Resolved Question:

No Comment Added
Submitted: 6 years ago.
Category: Tax
Expert:  Ed Johnson replied 6 years ago.

Dear MS,

Thank you for your question. Because this is a public venue, I hope you do not mind, that I am using your initials only.

Can you tell me more about thsi malpractice award.

Taxability depends on how the award was broken down:

i.e

personal injury

punative damages

compensatory damages

income replacement,

and so forth.

What was the legal malpractice law suit for?

Customer: replied 6 years ago.
Reply to Ed Johnson's Post: my client lost his legs in an accident. the attorney that represented him lost the case due to malpractice. my client sued the attorney due to the loss of his case. the attorney's insurance carrier is offering a settlement and my client wants to know whether it is taxable. he knows personal injuries are not taxable but is concerned because this is a legal malpractice case. your thoughts are really appreciated.
Expert:  Ed Johnson replied 6 years ago.

Dear MS,

Thank you for the additional information.

I apologize for taking so long.

Where it is not specifically mentioned in the regulations, the IRS bases the decision on the charachter of the settlement and what the settlement replaces.

So in general:

1. If a portion of the settlement is apportioned to replacing (or addional) personal injury form the orignal law suit, that portion would be non-taxable.

2. If a portion or all of the settlement is to replace beneifts of anykind, such as the lost personal injury determination then it is non-taxable.

3. However, if a portion or all of the settlement is punative then it is taxable. Most mal practice law suits, where personal injury specifically is not part of it, are taxable.

4. If a portion of this settlemen is for replacing income (lost wages) then it is not taxable.

Most settelments of this nature are punative or compensatory; however the INTENTION, if not stated in the language of the settlemen is what wins the day.

If the settlemen was to replace the lost physical injury damages, that occured as a result of the mal practice, then it would not be taxable.

You need to get that language worked out with the settlement, or go for an after tax figure.

 

Ed Johnson, Tax Preparer
Category: Tax
Satisfied Customers: 10760
Experience: GPHR Cert; U.S. Treasury Tax Advocacy Panel appointee
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