Our tax laws acknowledge that a return of capital doesn’t trigger income tax. The fundamental concept is that when property is taken away from a taxpayer and then returned to them, it doesn’t result in an increase in their net worth. Rather, their net worth is restored to where it was before, and since there…
Category: Lawsuit Awards
Lawsuit Awards
If you receive a settlement or judgment award from a lawsuit, it’s important to understand the tax implications. We can help you determine whether the award is taxable, what deductions are available, and how to minimize your tax liability. Give us a call to see how we can help, (713) 909-4906.
IRS Guidance on Structuring Attorneys Fees
It should not be a surprise to learn that attorneys often hire tax attorneys to help them minimize their taxes. One popular tax savings strategy for attorneys is to structure their contingent fees. A contingent fee is a payment arrangement in which a lawyer provides services on the condition that payment will only be made…
Tax on Damages for Loss of Consortium
If you’ve received damages from physical injuries or sickness, you don’t have to pay tax on the settlement or award. But what if others are also making ancillary claims in the same lawsuit? The case of the taxpayer-husband being injured and the taxpayer-wife making a claim for loss of consortium raises questions about the tax…
Tax on Payment for Being Born With Medical Condition
We can do some amazing things given the state of our science and technology. These advances lead to some interesting tax questions. The IRS recently addressed such a question in PLR 201950004. It considers whether damages paid by a fertility clinic for failing to perform a genetic test are excluded from the recipient’s income as…
Double Trouble: Taxability of Repeated Injury Lawsuits
As human beings, we strive to understand the laws of nature and our place in the world. Despite the advancements in technology, research, and science, there still remains much that is unknown. However, we do observe patterns and repetitions in both the natural world and human behavior. With each passing experience and as we age,…
Is a Lawsuit Award Payment Taxable?
If you receive payments from a lawsuit settlement award, are the payments excluded from Federal income tax? What if the payments are for claims of emotional distress or physical sickness? The Tishkoff v. Commissioner, T.C. Summary Opinion 2016-65, case provides an opportunity to consider these rules. Facts & Procedural History The taxpayer worked for Wells Fargo…
Evidence for Excluding Settlement Award from Income
Settlement payments paid to compensate a taxpayer for his physical sickness or injury are not taxable. Can you prove physical sickness or injury by showing that the payments were not for an economic harm? The court addressed this in George v. Commissioner, T.C. Memo. 2016-156. Facts & Procedural History The taxpayer was a car salesman in…
Litigation Settlements & the Limiting Deductions Involving Fraud
Our tax system is based on an arbitrary calendar or fiscal year. It measures income and expense and applies various rules based on this arbitrary period of time. This can create complications, as the arbitrary time may not capture the true essence of what is going on. Take the case of civil litigation where the…
Retirement Accounts: Restorative Payments vs. Return of Human Capital
If you get something returned to you, you generally do not pay income tax on the return. You just get your property back. It can be difficult to tell whether you are getting your property back or getting some other property back. Is there a difference? Or should there be a difference? The court grappled…
Compensatory Damages May Not be Taxable
The tax code is an intricate and complex framework that governs the collection of taxes in the United States. While numerous provisions have been contested in courts, it is quite rare for a provision to be deemed unconstitutional, particularly for a tax code section that has already undergone substantial litigation. In the landmark case of…