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Two of the questions clients have about settlements are: Is the settlement taxable? And if so, how is the settlement treated for tax purposes? The answers to these questions turn on the nature of the underlying claim(s) giving rise to the settlement.
Some settlements are taxed as ordinary income, subjecting income tax and employment tax withholding in certain instances. Other types of settlements are taxable as capital gains. There are also questions related to the treatment of that portion of the settlement, if any, attributable to attorneys' fees.
This program provides a practical guide to the tax treatment of settlements in civil litigation.
- How the underlying claim giving rise to a settlement determines its tax treatment
- Loss of income or gross business profit v. destruction of capital property
- Special treatment for physical injury
- Treatment of portion of settlement attributable to attorneys’ fees
- Income and employment tax withholding from settlements