Ever since the first income tax, gross income has included all income from whatever source derived. However, Congress has always provided for certain exclusions from gross income, including an exclusion for 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. In other words, if you are injured and recover damages for your physical injuries or sickness, then all of your damages may be tax-free, even the damages attributable to your lost wages.
Have you suffered emotional distress? Did the emotional distress worsen an already serious medical condition? If so, then your damages may be tax-free, but only if your attorney drafts your lawsuit properly. It is always best to seek the advice of an experienced tax attorney before filing a lawsuit to recover significant damages. A properly drafted complaint can save you hundreds of thousands of dollars, but only if you act before your lawsuit.
David Lee Rice, A Professional Law Corporation, regularly advises defendants on the tax consequences of their litigation matters. When a defendant makes a payment to a plaintiff for a physical, then the payment is generally not taxable, and a Form 1099 should not be issued. Each case is different, though, so you should contact your tax advisor for a consultation.
Structured Settlements
A structured settlement is the payment of money to settle a claim where the recipient of the payment receives future payments in lieu of, or in addition to, a single upfront payment. Structured settlements may consist of installment payments and future lump-sum payments, and may be scheduled for any length of time. The settlement’s payment schedule is structured to meet the financial needs and objectives of the injured individual.
Today, it is fairly common for lawsuit recoveries in personal injury actions to stretch well into the seven-figure dollar amounts:
- $31 million to a young girl with traumatic brain injuries after a collision with a speeding, intoxicated driver. Landeros v. Torres, Kern County Superior Court.
- $5,322,356 when a worker was fatally electrocuted at a packaging plant after cutting into a cable that was supposedly de-energized. Confidential v. JCJ Electric Inc., Monterey County Superior Court.
- $1.85 million to a woman working in the cold storage area of a warehouse after she was struck and injured by a forklift. Zegerman v. NZG Specialties Inc., Los Angeles County Superior Court.
These amounts, received on account of personal physical injury or physical sickness, are excludable from the recipient’s income. But what about the future earnings on the excluded recoveries and the ability of the recipient (or his financial advisors) to effectively manage such a large sum of cash? Structured settlements provide continued tax benefits to recipients, while also providing a stable and secure stream of payments for several years into the future.
David Lee Rice, A Professional Law Corporation, works with clients and their advisers on all aspects of litigation. If you have suffered a personal injury, are involved in business litigation or are interested in learning more about structured settlements, please contact us for a consultation.
