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Are discrimination settlements taxable?

If you have ever sued a person and received a settlement for your physical or mental pain, you may wonder: Are settlements taxable? The answer would be yes or no, depending on the nature of the settlement.

According to the Publication 4345 from the IRS, settlements for physical injuries would be deemed non-taxable if you did not itemize deductions for medical expenses associated with the injury. For employment-related lawsuits, such as those involving discrimination, the tax laws are a little different.  Physical injuries or sickness are tax free. Damages awarded for emotional injuries are not tax free. The exception to this is if the emotional issues were triggered or caused by a physical injury or sickness.

Settlements are typically divided into various portions. For example, a portion of your settlement may be for lost wages. A portion may be for mental anguish. There may be amounts allotted for other damages you suffered. The portion of your settlement that you received for lost wages would be considered taxable. Lost wages could include back pay, front pay and severance pay. These amounts would be subject to Social Security and Medicare tax rates. You would also be responsible for employment taxes and you would have to report it as income on Form 1040 on your tax return.

Contact Ricotta & Marks, P.C.

You do not have to tolerate workplace discrimination or accept working in a hostile environment. We are here to protect you and your livelihood. Call Ricotta & Marks, P.C., at 800-240-9269 or send us an e-mail to schedule your free initial consultation today.

Read more about taxation and sexual harassment settlements here.

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