Q Do you pay tax on court awards from settlements?
A “There are several types of awards, settlements and damages that can be awarded by the court and each one gets treated a bit differently,” said Gene Utterback, an accredited business accountant, registered financial consultant and member of the Maryland Society of Accountants.
For example, say you hurt your back at work lifting something too heavy under your supervisor?s orders.
“You leave the job and go to the hospital, and the company terminates you for leaving,” Utterback said.
After a lawsuit, the court awards you $10,000 for medical costs, pain and suffering; $25,000 for wrongful termination; and $50,000 in punitive damages.
“The $10,000 is tax-free because it is related to a physical injury,” Utterback said.
The wrongful termination payment is taxable because it is in lieu of your wages, which would have been taxed.
Lastly, “the $50,000 is taxable because it is not about compensating you; rather, [it] is intended to punish the company for treating you badly,” he said.
