The New Relationship Between Taxes and Lawsuits

         Hearing of high-profile lawsuits in the news, and the large judgements that come with them, is not unusual. In these situations, we know that the lawyers get to keep a good amount of the money as a part of their fees. How much do those involved in the legal action get to keep? When we hear of large settlements or decisions in a case, how will taxes impact the amount of money that will be received?

          From the point of view of the IRS, there is a difference between money received because of physical symptoms related to emotional distress, and money received because of physical injuries or sickness. Physical injury cases have been, and still are, tax free. However, there is a new potential concern, especially for those who have sexual harassment cases.

          Changes in the tax law, brought on by the Tax Cuts and Jobs Act (TCJA), will now deny most tax deductions for legal fees and settlement payments if there is a Nondisclosure Agreement. Most sexual harassment cases have these types of clauses in them when there is a settlement. With or without a confidentiality agreement, 100% of the amount recovered as a result of the lawsuit must be declared to the IRS and a Form 1099 will be issued by the group who must pay. This must happen even if the lawyers take a percentage of that money. However, the IRS has recently stated that the plaintiff in the case may still deduct their legal fees, and lighten the tax responsibility placed on their judgement. There are several tax considerations that should be given some attention. They can have a real impact on the financial value of a legal judgement.

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