Learn About Taxation of Damage Rewards in California
Since the very beginning of income tax, gross income has included income from any and all sources. The government has the right to tax all of your gross income. However, they have always provided exclusions that allow certain forms of income to not be included in your total gross income. This means there are certain forms of income that the government will not tax, which may include any damage payments you receive in lawsuits or settlements (other than punitive damages). In order to ensure your damage reward remains tax-free, you need the skills of an experienced lawyer like David Lee Rice APLC, to assist your litigation attorney in drafting your lawsuit correctly. It’s best to call him before even filing a lawsuit to recover your damages. Thanks to his experience with tax law in Torrance, CA, David will make sure you get the money you deserve and that it is not taxed unfairly. Contact his office today to schedule a consultation about your case.
In What Cases are Damages Tax-Free?
There are certain conditions that must be met for your damage reward to be considered exempt from taxes. The most crucial of these conditions is that the damages must arise from a physical illness or physical injuries, and you must be able to prove the adverse effects on your physical well-being. This can be a difficult task if you aren’t well prepared or you don’t have the right knowledge. Not to mention when it comes to tax filing, you don’t want to make any errors that could leave you to pay a fine or face more serious penalties later. Luckily, David Lee Rice APLC is here to help you understand how to properly file state taxes in the event that you have been awarded damages. Your damages may be exempt from taxes in any of the following circumstances:
- Physical Injury or Illness: Were you injured in an accident or involved in an incident that caused a physical illness? The damages received from such instances are considered tax-exempt under California law. This includes damages attributable to lost wages.
- Emotional Distress that Caused a Medical Condition: Emotional distress alone does not result in tax-exempt damages. However, if the emotional distress caused or worsened a medical condition that resulted in physical illness, your settlement will likely be tax-free.
- Recovery of Medical Expenses: Medical expenses that are recovered during a lawsuit are always tax-free.
Cases Where Damages are Not Tax Exempt
Unfortunately, not all damage rewards are exempt from taxes. There are some cases where the damages will be included in your gross income, meaning you’ll have to pay taxes on them. David Lee Rice APLC will be able to help you determine if your case falls in this category, so you can plan to pay the taxes and avoid any legal problems with the government for owed taxes. All of the following damage rewards are likely to subject to taxation:
- Punitive Damages: Punitive damages are assessed to punish the defendant for their wrongdoing. This usually takes the form of payment to the plaintiff. These payouts are considered part of your gross income, and as such, are taxable by the government.
- Emotional Distress: Symptoms of emotional distress are not considered to be physical injuries. Therefore, the damages received for emotional distress can be taxed. However, in cases of PTSD, if you can prove the condition caused by material changes to the brain, your damages may be tax-free.
- Confidential Sexual Harassment Cases: If a sexual harassment case is confidential, the defendant is not able to deduct the settlement payment or legal fees on their yearly taxes. As currently written, this rule also applies to plaintiffs as well.
Schedule a Consultation with Our Team
Are you ready to file a lawsuit in which you could be awarded damages? If so, you need our team of tax attorneys on your side to ensure you get a fair outcome. With years of experience in tax filing, IRS tax cases, property tax, and business tax, we are the taxation experts to choose for all your tax law cases. We serve Torrance and Rancho Palos Verdes, CA, as well as all of the surrounding areas. Contact us today to schedule a consultation and get the help you need in your tax case.