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The simple answer to the question regarding the tax consequences of a settlement claim is it all depends on the nature of the settlement!

Generally speaking, settlement money received from cases involving personal physical injury or physical sickness can be excluded from taxation (IRS Code sect. 104(a)(2)). Certain other types of settlement awards, (considering the nature of the item that the settlement replaces), may be taxable, including compensation for lost wages or lost profits; breach of contract damages, employment discrimination, emotional distress (if not related to physical injury or sickness); and punitive damages just to name a few.

In conclusion, only settlements from physical injury or sickness are non-taxable; generally all other types of settlements are taxable. Given the complexity of litigation, settlements and tax consequences, it is important and prudent to speak to an attorney, accountant, or tax advisor for clarification on this issue. Attorneys at Heiting & Irwin are always available to assist our clients with all of their legal needs and questions.

Dennis Stout

Dennis Stout is a native Californian with significant ties to the Inland Empire, where he continues to reside. A graduate of Upland High School, the University of California, Riverside (B.S. Economics), and the University of La Verne (J.D.), Mr. Stout has practiced law continuously since 1979. He has been married to his wife, Alicia (R.N., C.E.N., M.I.C.N.) since that same year, and they have three adult children, all of whom live in Southern California. View Attorney Dennis Stout's Attorney Bio Here.

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