Have a Tax Question? Ask a Tax Expert
Hello JA Customer,
Lawsuit awards or settlements may or may not be subject to tax, depending on the nature of the settlement. Settlements which are awarded as compensatory damages for physical injury or illness are not subject to tax at all. Punitive damages which are awarded as more or less of a "punishment" to the plaintiff for wrong doing, are subject to tax at ordinary income tax rates. The settlement may contain a combination of both compensatory damages and punitive damages. You would need to check with the law firm who is handling the administration of these claims for advice on how the settlement was broken down. The legal firm handling this is Brown Greer PLC in Richmond, VA
If any of the settlement amounts are for punitive damages, that portion of the settlement will be reported to you at the end of the year on a 1099 form, and the amount must be included as ordinary income on your tax return. So the actual amount of tax you would pay depends on just how much other income you have for the year in addition to this settlement, as it is your overall income for the year and your filing status that determines the tax bracket you are in.
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