Tax-free components
Damages for physical injury or physical sickness (Section 104(a)(2)). Medical expense reimbursement. Return of capital (e.g. property damage).
Taxable components
Punitive damages (always). Interest on any award. Emotional distress damages (unless originating from physical injury). Lost wages and lost profits.
Attorney fees
Post-TCJA, most contingency-fee arrangements leave the entire settlement reportable, with the attorney fee not deductible. Exceptions for employment discrimination and whistleblower cases.
Common questions
- Is my car accident settlement taxable?
- Physical injury portion no. Property damage no (to the extent of basis). Lost wages portion yes. Punitive portion yes.
Related
Personal Income Tax Preparation
Federal and state 1040 preparation with year-round planning. We handle W-2, 1099, K-1, rental, and crypto income for individuals in Florida and all 50 states.
Tax Planning
Year-round tax planning for individuals and business owners. We project the year's income quarterly and model decisions before they become tax liabilities.