Tax Consequences of Legal Settlements: Analyzing Settlement Agreements, Types of Awards, and Attorney Fees

Note: CLE credit is not offered on this program

Recording of a 110-minute CPE webinar with Q&A

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Conducted on Thursday, January 6, 2022

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Course Materials

This course will explain how to determine whether proceeds from a legal settlement are taxable to a recipient and deductible by a payee. The panelist on the taxation of damage awards and payments will discuss how to analyze settlement agreements for tax consequences and relevant cases concerning these awards.

Description

Already wronged, recipients of settlements and judgments are often surprised to learn the restitution they receive is subject to tax. More unsettling, the recipients are often subject to tax on the fees paid to their attorneys as well. Only under specific circumstances are settlements not taxable. Section 104(a)(2) provides "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 physical injuries, or physical sickness" are not includable in gross income.

Even though awards for physical injuries are not taxable, determining that an award is for bodily injury is often not straightforward, even after examining the settlement agreement. Consequently, the taxation of settlements is constantly challenged in court. On the other side and equally frustrating, the payment of damages is often not tax-deductible.

Most legal suits involve multiple issues, so the payments received can be for numerous types of injuries. Additionally, there are multiple exceptions and nuances to the rules surrounding the inclusion of income and deductibility of legal expenses from settlements. Tax advisers working with clients and businesses receiving and paying settlements need to be aware of the tax consequences of these payments and receipts.

Listen as our renowned expert on the taxability of settlements and judgments explains when these awards are taxable and deductible and offers advice for handling situations when these determinations are unclear.

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Outline

  1. Legal settlements: introduction
  2. Types of settlements
  3. Taxation of settlement awards
  4. Deductibility of settlement payments
  5. Tax reporting and attorney fees included in settlements
  6. Interpreting the tax language in settlement agreements
  7. Relevant cases
  8. Best practices

Benefits

Our panelist will review these and other critical issues:

  • Analyzing a settlement agreement for tax consequences
  • What is considered a physical injury?
  • When are attorney fees taxable to an award recipient?
  • Key tax considerations before a case is settled
  • Types of awards that are not subject to tax

Faculty

Wood, Robert
Robert W. (Rob) Wood

Managing Partner
Wood LLP

Mr. Wood has broad experience in corporate, partnership and individual tax matters. Concerning the tax treatment of...  |  Read More

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