There are many lawsuits against lawsuits, Wood notes, and there are questions about the impact on the mind and body. “You would think there would be very simple answers” to questions about the taxability of damages in these cases, but the tax law is never simple, Wood opines. The issue is whether a damage award is for physical injuries, which is not taxable, or for emotional distress, which is taxable.
Right now, obviously, the plaintiffs are trying to collect the money; they can worry later whether it is taxable. There is a significant distinction between physical injuries and physical symptoms that are caused by emotional distress, such as harassment in the workplace or intentional infliction of emotional distress.
Another issue is the award of legal fees, especially in actions where there is a contingency fee award. One possible outcome is the anomalous situation where the plaintiff pays taxes on the amount of the award paid to the lawyer, and the lawyer pays taxes on it as well. This points up the wisdom of consulting a tax expert.
For more information on the subject, please refer to Mr. Wood’s article in Forbes. Robert Wood is a tax attorney with Wood, LLP in San Francisco, California and spoke with The Tax Law Channel, an affiliate of The Legal Broadcast Network. The Legal Broadcast Network is a featured network of the Sequence Media Group.