Settlements & Lawsuits
It is important you contact a tax professional before signing and agreeing to any settlement or lawsuit. Most money awarded because of a lawsuit claim will be subject to taxes. To ensure that you are following the tax laws and tax code correctly, we recommend speaking to a professional accountant as soon as possible, especially if you will collect a large settlement.
Lawsuit settlements and damages are generally separated into taxable and nontaxable but there are exceptions to every rule and each lawsuit claim unique. Sometimes, the settlement can be structured in a tax advantaged way.
For example, the tax deductibility of expenses related to sexual harassment settlements will not be allowed. There is a change in law from the TCJA that limits the deductibility of legal expenses when the case has anything to do with sexual harassment and contains a nondisclosure agreement. As a general rule, any settlement that involves punitive damages is taxed on 100% of the recoveries but it can be complex in certain instances. Maintaining a company’s reputation now comes with a tax consequence with a nondisclosure agreement but the recipient could leverage their position to structure a settlement that would result in less taxes if structured other ways.
Contact LNK Tax Group at 661-491-7222 or 213-588-1120 or you can book a free consultation online to learn more the taxation of settlements and lawsuits. We provide tax consulting and tax planning on maximizing tax deductions to businesses and individuals in Downtown Los Angeles and Santa Clarita including, Valencia, Stevenson Ranch, Newhall, Castaic, Canyon Country, Agua Dulce, Saugus, Rancho Santa Clarita, Sylmar, Mint Canyon, Val Verde, Mission Hills, Castaic Junction, Granada Hills, Porter Ranch, San Fernando Valley, and Los Angeles County.