96-65 - Under current Section 104(a)(2) of the Code, back pay and damages for emotional distress received to satisfy a claim for disparate treatment employment discrimination under Title VII of the 1964 Civil Rights Act are not excludable from gross income. 85-97 - The entire amount received by an individual in settlement of a suit for personal injuries sustained in an accident, including the portion of the amount allocable to the claim for lost wages, is excludable from the individual's gross income. Publication 4345, Settlements – Taxability PDF This publication will be used to educate taxpayers of tax implications when they receive a settlement check (award) from a class action lawsuit. Resources (Court Cases, Chief Counsel Advice, Revenue Rulings, Internal Resources)ĬC PMTA 2009-035 – OctoPDF Income and Employment Tax Consequences and Proper Reporting of Employment-Related Judgments and Settlements Section 1.104-1(c) defines damages received on account of personal physical injuries or physical sickness to mean an amount received (other than workers' compensation) through prosecution of a legal suit or action, or through a settlement agreement entered into in lieu of prosecution. IRC Section 104(a)(2) permits a taxpayer to exclude from gross income "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 injuries or physical sickness IRC Section 104 explains that gross income does not include damages received on account of personal physical injuries and physical injuries. For damages, the two most common exceptions are amounts paid for certain discrimination claims and amounts paid on account of physical injury. IRC Section 61 explains that all amounts from any source are included in gross income unless a specific exception exists. ![]() ![]() ![]() The key question to ask is: "What was the settlement (and its corresponding payments) intended to replace?" IRC Section and Treas. However, the facts and circumstances surrounding each settlement payment must be considered to determine the purpose for which the money was received because not all amounts received from a settlement are exempt from taxes. IRC Section 104 provides an exclusion from taxable income with respect to lawsuits, settlements and awards. This section states all income is taxable from whatever source derived, unless exempted by another section of the code. The general rule regarding taxability of amounts received from settlement of lawsuits and other legal remedies is Internal Revenue Code (IRC) Section 61.
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