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Is The Money You Receive Out Of A Lawsuit Taxed?

The answer depends on what type of damages you are seeking. For example, an award of money for physical injuries is not considered income and is not subject to tax laws. It matters not whether a lawsuit was filed, whether you settled the case before trial, or you were granted a judgement at trial.


However, as you expected, there are certain instances in which the money you receive arising out of a lawsuit is subject to tax laws. For instance, an award of money for lost wages is taxable as income. An award of money for lost wages is counted as income for obvious reasons.


You can also have different damages under the same lawsuit in which some of your award will be taxed, and other portions will not be taxed. For example, if you were involved in a car accident and were unable to work as a result of that accident, any money that went towards your claim for lost wages would be subject to tax laws despite the cause of your lost wages being physical injury due to the car accident. However, any compensation awarded for your physical injuries out of the car accident is not subject to income tax laws. In that case, some of your award would not be subject to tax laws, and some of your award would subject to tax laws.


If you are awarded money for a breach of contract, that money may be considered income and is subject to the tax laws. Any award for punitive damages, (that is money awarded to you as a punishment against another individual), is subject to tax laws. Your lawyer should ask a judge or the party paying, to separate the various awards so that you are able to show the IRS what is taxable and what is not. In Florida, personal income is not taxed, so there are no state taxes on any compensation considered personal income. However, in the above examples where applicable, you will still be subject to federal income tax laws.


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