A lawsuit is a long and challenging process, and towards the end you may just be happy that it’s almost over. After all the stress, paperwork, and meetings with your attorney, you’ll finally be able to move on with your life. And if you’re about to win - or you already have - you may be ecstatic. It’s over, and you’ve received the justice and closure you deserved since the start.

As a trial lawyer from a firm like Cohen & Cohen can explain, whether you dealt with a personal injury, discrimination, or a wrongful termination, winning a lawsuit can grant you a sizeable amount of settlement money. But, unfortunately, you won’t be out of the woods just yet. If you get compensation from a lawsuit, you have to worry about taxes.

Do I Have to Pay Taxes on My Settlement?

According to the Internal Revenue Code (IRC) of the IRS, all income is taxable unless there is an exemption somewhere else in the code. Fortunately, reading a little further into the IRC, you’ll find a handy bit of information: There is an exclusion from taxable income when it comes to lawsuits, settlements, and awards.

This sounds promising, but in true IRS fashion, it’s never as simple as it should be. This exclusion only applies to certain types of lawsuits.

The IRS breaks up lawsuits into two separate categories: those that are relating to physical injuries, and those that are relating to non-physical injuries. Within these two categories, the IRS breaks them each down into three subcategories: actual damages from physical injuries, emotional distress or damages from non-physical injuries, and punitive damages.

If your lawsuit was regarding physical injuries, your settlement money is exempt from tax. On the other hand, if your lawsuit was regarding emotional distress, or non-physical injuries such as libel, your settlement money will be taxed. However, in the cases of emotional distress, there’s one last lifeline to protect you from taxes: If that emotional distress can be traced back to actual physical injury, your settlement money won’t be taxed after all.

But what about punitive damages? Unfortunately, if you win any money as punitive damages, that settlement money counts as income, and is therefore taxable. The same rule applies for lawsuits regarding employment or discrimination.

There’s one more hitch to any money you may win. If your case was any of the types of lawsuits that are taxed, any money you won as legal fees will be taxed as well. This means if you won attorney fees in a punitive, employment, or discrimination-related case, you’ll have to pay taxes on those fees as well. This can especially sting if all you won was attorney fees.

Reach out to an Attorney Today

The IRS provides exemptions to settlements from certain cases, but not to others. It can be challenging and frustrating to go through the difficulties of a lawsuit only to learn that you’ll have to pay taxes, but it all depends on the sort of case you’re pursuing.

If you’re considering filing a lawsuit, you shouldn’t hesitate to get in touch with an attorney who can explain what kind of tax burden you’d be looking at. It’s important to be informed before taking legal action, and the right attorney can make all the difference.