What Kinds of Damages are Not Taxable?
The only damages you can enjoy tax-free are compensatory damages. Compensatory damages are damages that compensate for physical injury or physical illness.
What Kinds of Damages are Taxable?
There are other kinds of damages that are taxable. For example, if you have won a discrimination suit against your former employer, you may have received an award for back pay and for emotional distress. Back pay means the pay you would have received if you hadn't been fired. None of this relates to physical harm and it is taxable at ordinary income tax rates. Punitive damages are normally taxable even if the underlying case resulted from an injury or sickness.
Can an Award Place Me in a Higher Tax Bracket?
If you receive a court award you also raise your annual income and you may suddenly find yourself in a higher tax bracket, which can mean higher taxes.
Is the Attorney Award Taxed Twice?
Plaintiffs are taxed on the portion of the award that they pay to their attorneys as fees. Even though a damage reward is usually given that includes both attorney fees and costs, the tax the plaintiff has to pay on the award is not included.
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Last Modified: 07-30-2009 02:41 PM PDT
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