Are Lawsuits Taxable?


It’s not like they came right out and said “are lawsuits taxable? “, but you can pretty much get the drift of what I think the answer to that question is. The answer to that question is not as black and white as many people would like you to believe. Are some lawsuits not taxable? No, not necessarily.

First of all, let me just say that when the plaintiff in a lawsuit sues a person who is responsible for her injuries, does the defendant take responsibility to compensate her for those injuries?

Most likely not. Often times, a class action lawsuit that involves a large number of plaintiffs would be held by a court to be a “class action” and therefore the lawsuits would not be “taxable”.

Now then, one could argue that in some cases that is totally true.

For example, if a factory produces defective products and then pays a check to the person who suffers injury from that product, that case might be considered a class action lawsuit and thus her damages would be taxable. I think that is a stretch. The same goes if there was a financial institution that allows one type of settlement but then pays taxes on the payments to people who have been injured through that settlement, that would be considered a tax advantage to that entity. Again, I think that stretch is pretty far-fetched.

However, lawsuits involving large sums of money do tend to be held to be “taxable” by the court.

If a person who has received a large settlement in a personal injury case then later loses that settlement when another person sues that person for that money, the person who received that settlement is generally going to be able to sue that person again and receive that money. This could be viewed as a “class action lawsuit settlement”. Therefore, any tax on those monies would be considered a tax on the profits of the settlement itself and that may well be taxable.

Of course, it is very important for anyone considering any monetary award to consult with a qualified attorney before making any financial decisions

. When it comes to tax issues, it is very important that you obtain your accounting and consulting firm’s opinion as to whether or not the potential tax consequence of a specific lawsuit settlement is going to be mitigated through the use of a court-approved “licensing” agreement. If your tax professional determines that this is an appropriate route for you to pursue you should proceed with the necessary documents and submit your answer to the attorney representing your viewpoint to the judge. You will then receive a check for the tax portion of your settlement. Please consider all this.

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