How Legal Settlements and Judgments are Taxed
Robert W. Wood
Robert W. Wood is a tax lawyer with www.WoodLLP.com, and the author of numerous tax books, including Taxation of Damage Awards & Settlement Payments (www.TaxInstitute.com). This discussion is not intended as legal advice.
Lawyers and clients resolve disputes all the time, usually with an exchange of money and a release. Of course, almost any time money changes hands, there are tax issues, too, usually for both sides. Most lawyers rightly tell their clients that they are not tax advisers, and that it is worth seeing a tax lawyer or accountant to get straight on the tax implications.
Yet, after such a disclaimer, some lawyers do succumb to the temptation to offer some free tax advice. For example, the lawyer might say, ‘I’m not a tax lawyer, but don’t worry, all these damages are non-taxable.’ But whether you are a lawyer or a client, a basic grounding in these issues will help you, not only with your own taxes, but possibly with colleagues’ taxes too.