When you reach a settlement agreement in a lawsuit, there are typically four types of payments that may be made: compensatory, punitive, remedial and nominal. Not all of these payments are taxable, but some of them are. Here’s a look at the four types of payments that are typically taxable:
1. Compensatory Payments
Compensatory payments are intended to compensate you for your losses. For example, if you were injured in a car accident, the compensatory payments would be intended to reimburse you for your medical expenses, lost wages, and other damages. These payments are typically taxable.
2. Punitive Payments
Punitive payments are designed to punish the defendant for their actions and to deter them from engaging in similar behavior in the future. For example, if a company is found guilty of infringing on a patent, the court may order the company to pay damages to the patent holder. These payments are taxable as punitive damages.
3. Remedial Payments
Remedial payments are designed to fix the harm that was done in the lawsuit and to make you “whole” again. For example, if a company is found guilty of infringing on a patent, the court may order the company to stop producing the infringing product and to pay damages to the patent holder. These payments are typically taxable.
4. Nominal Payments
Nominal payments are payments that are made for legal fees, costs, and expenses to bring the lawsuit or to defend it. For example, if you hire an attorney to represent you in a lawsuit, the attorney’s fees are a nominal payment. These payments are typically taxable. That said, there are some exceptions. For example, if you are a government employee and are sued in your official capacity, then the legal fees may be tax-exempt.
These four types of lawsuit payments can be a bit confusing, so it’s important to speak with an accountant or tax lawyer if you have any questions and to make sure that you are reporting the correct amounts on your tax return. And remember, just because a payment is taxable doesn’t mean that you have to pay taxes on it. You may be able to offset the payments with other deductions.
If you need legal representation in a lawsuit, be sure to consult with an experienced attorney like Napoli Shkolnik. They can help you understand your rights and can guide you through the lawsuit process. For more information, visit their website today at www.napolilaw.com.