Answering your Tax Debt Questions, Lawsuit Settlements and Taxes

I give lectures occasionally, which give me the opportunity to answer questions from taxpayers just like you. I've touched on most of the subjects on this blog, but this morning someone asked a question I don't think I've covered:

How are lawsuit settlements handled tax wise?

This can go several ways, and it all depends on why you're receiving the settlement.

Settlement for lost wages- This is usually due to termination. Either way, wages are taxable. Thus, this settlement is taxable.

Punitive Damages- These are also taxable

Reimbursement of Medical Expenses- Good news, the IRS will not tax Reimbursements for Medical Expenses. But cover your tracks, and make sure your Settlement is classified this way. Otherwise, the IRS might try to dip in.

More Questions? If you have any tax related questions, e-mail me or leave one in the comments, I'll be glad to answer it.