Tax Consequences of Legal Settlements: Analyzing Settlement Agreements, Types of Awards, and Attorney Fees

Already wronged, recipients of settlements and judgments are often surprised to learn the restitution they receive is subject to tax. More unsettling, the recipients are often subject to tax on the fees paid to their attorneys as well. Only under specific circumstances are settlements not taxable. Section 104(a)(2) provides "the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries, or physical sickness" are not includable in gross income.

Even though awards for physical injuries are not taxable, determining that an award is for bodily injury is often not straightforward, even after examining the settlement agreement. Consequently, the taxation of settlements is constantly challenged in court. On the other side and equally frustrating, the payment of damages is often not tax-deductible.

Most legal suits involve multiple issues, so the payments received can be for numerous types of injuries. Additionally, there are multiple exceptions and nuances to the rules surrounding the inclusion of income and deductibility of legal expenses from settlements. Tax advisers working with clients and businesses receiving and paying settlements need to be aware of the tax consequences of these payments and receipts.

Listen as our renowned expert on the taxability of settlements and judgments explains when these awards are taxable and deductible and offers advice for handling situations when these determinations are unclear.

1. Legal settlements: introduction
2. Types of settlements
3. Taxation of settlement awards
4. Deductibility of settlement payments
5. Tax reporting and attorney fees included in settlements
6. Interpreting the tax language in settlement agreements
7. Relevant cases
8. Best practices

Our panelist will review these and other critical issues:

• Analyzing a settlement agreement for tax consequences
• What is considered a physical injury?
• When are attorney fees taxable to an award recipient?
• Key tax considerations before a case is settled
• Types of awards that are not subject to tax

Learning Objectives

After completing this course, you will be able to:

• Ascertain when settlement payments could be tax deductible
• Determine what types of awards are taxable
• Decide when attorney fees could be taxable settlement proceeds
• Identify specific language in settlement agreements that could determine the taxability of proceeds

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite: Three years+ business or public firm experience preparing complex tax forms and schedules, supervising other preparers or accountants. Specific knowledge and understanding of individual income taxation, including itemized deductions, individual income tax credits, net operating loss limitations including carrybacks and carryforwards.

Strafford Publications, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of Accountancy have final authority on the acceptance of individual courses for CPE Credits. Complaints regarding registered sponsons may be submitted to NASBA through its website: www.nasbaregistry.org.

IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).