Is your settlement taxable or tax exempt? What’s in your release? Settlements and jury verdict awards for emotional distress may be taxable and lost income is taxable. Does your release state that the settlement is only for physical personal injuries and non-economic losses? If your release is silent on these issues, the IRS may make the decisions. Before taking your case to verdict, be aware that the jury will allocate your award for each type of damage, without consideration of taxes.
Litigating to avoid taxation of personal injury damages – the CPA Journal
Lawsuit awards and settlements audit guide – the CPA Journal
Avoiding Penalties When Reporting Damage Awards and Settlements – Four steps CPAs can take. This article cites Banks, II, 125 SCt 826 (2005) where the Supreme Court held that attorneys’ fees paid to an injured party’s attorney also may be reportable as taxable income to the injured party. But this article Misassigning Income: The Supreme Court and Attorneys’ Fees by Georgetown University Law Center seems to indicate that the problem was legislated away.
Federal Income Tax and Personal Injury Settlements & Judgments – by Fred A. Simpson
Lawsuits, Awards, and Settlements Audit Techniques Guide – IRS audit guide.
Should Personal Injury Awards be Taxed? – a student paper.
Lawsuit loans are really not loans. That’s why the companies which “loan” money to plaintiffs in accident cases are able to charge such high rates of interest. If it was a loan, the interest rate would be usurious (usury) which is illegal. What makes these “loans” legal is that they are an investment in your case. This is called non-recourse funding. The company “loaning” you the money is investing in your case because if you lose your case, if you don’t have to pay the money back. If it was a loan, you would have to pay the money back.
Ethics Opinions Regarding Non-Recourse Funding – A list of opinions in most states concerning money provided to plaintiffs in personal injury cases.