Higgins Settlement Law, L.L.P is a tax-law firm that specializes in the taxation of settlements. We are the only law firm in the country with that specialty. Below are answers to the most commonly raised questions relating to the taxation of settlements. Only the general rules are included below, your facts may change the result. Please call Higgins Settlement Law, L.L.P for advice relating to your case today.


How are physical, personal-injury damages and related fees taxed?

Physical, personal-injury damages are excluded from gross income and are not taxable. Internal Revenue Code section 104(a)(2) provides that exclusion. Any settlement amounts that are received, whether as a lump-sum or as periodic payments, on account of a physical personal injury likewise are excluded from gross income and do not appear on your income tax return.

The attorney’s fees and costs that you pay to recover the physical, personal-injury damages are not deductible.

How are non-physical personal injuries taxed?

Damages for non-physical personal injuries are taxed as ordinary income and included in your gross income on your tax return. Your attorney’s fees and costs for recovering nonphysical, personal-injury damages are deductible. Note, however, that the alternative minimum tax may apply to those deductions.

How can I determine whether my injury is physical or nonphysical?

Neither the Code nor the legislative history defines “personal physical injury.” Black’s Law Dictionary defines it as “bodily harm or hurt, excluding mental distress, fright, or emotional disturbance.” 1304 (Rev. 4th ed. 1968) The Internal Revenue Service defines it as “direct unwanted or uninvited physical contacts resulting in observable bodily harm such as bruises, cuts, swelling, and bleeding.” (PLR 200041022 (July 17, 2000)). The Tax Court has been more lenient, permitting the exclusion if severe pain is present (Amos v. Commissioner, T.C. Memo 2003-329, 86 T.C.M. (CCH) 663 (2003)) but not mere discomfort from false imprisonment (Stadnyk v. Commissioner, T.C. Memo 2008-289, 96 T.C.M. (CCH) 475 (2008)).

As the only law firm in the country specializing in the taxation of settlements, Higgins Settlement Law, L.L.P is uniquely qualified to assist you with determining whether your injury is physical or nonphysical and the resulting tax treatment of your damages or settlement.

How are emotional distress damages taxed?

If the emotional distress damages are attributable to a physical personal injury, then the emotional distress damages are excludable from the plaintiff’s gross income under section 104(a)(2).

If the emotional distress damages are not attributable to a physical personal injury, then they are taxed as ordinary income.

How are punitive damages taxed?

Punitive damages are included in gross income and taxable under section 61 of the Internal Revenue Code. Your attorney’s fees and costs that are allocable to punitive damages are deductible under section 212. Note, however, that the alternative minimum tax may apply to those deductions.

How are prejudgment and post-judgment interest taxed?

Prejudgment and post-judgment interest are both included in gross income and taxed under section 61(a)(4). The portion of your attorney’s fees and costs allocable to such interest is deductible under section 212. Note, however, that the alternative minimum tax may apply to those deductions.

How are contingent fees treated?

Contingent fees and costs paid to recover nontaxable damages for a physical personal injury are not deductible. Contingent fees and costs paid to recover damages for a nonphysical personal injury, for pre- and post-judgment interest and for punitive damages are deductible.

Will I pay an alternative minimum tax?

If you have deductible attorneys fees and costs (for interest, nonphysical injuries or punitive damages), then you may owe an alternative minimum tax unless your nonphysical personal injuries arise from discrimination. The calculation of the alternative minimum tax is complex and may or may not apply to your settlement, depending, in part, on your other income and deductions for the year. Higgins Settlement Law, L.L.P. can calculate your alternative minimum tax.