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Is a settlement or damages taxable to recipient litigant?

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    The starting point for computing an individual’s tax liability is determining what is included in gross income. Section 61 of the Internal Revenue Code (IRC) defines gross income as “all income from whatever source derived.” A widely accepted definition of income is “undeniable accessions to wealth, clearly realized, and over which taxpayers have complete dominion.” Thus, income is taxable when realized or in the year earned. IRC §§ 6041 and 6051 and Treasury Regulation 1.6041-1(f) and 1.6041-2 are the operative provisions with respect to the reporting requirements for the client receiving the settlement or award.

    Typically, any damages for non-physical injuries or sickness, all punitive damages (even if they relate to physical sickness or injury), compensatory damages for non-physical sickness or injuries arising from employment discrimination or defamation, and any other taxable damages are required to be reported in Box 3 of Form 1099-MISC. Box 3 is where you report other income that is not reportable in one of the other boxes on Form 1099-MISC. However, if an award of back pay that constitutes wages is awarded, it typically would not be reported on Form 1099-MISC, but rather on Form W-2.

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    Representing Clients from U.S. and International Locations Regarding Federal and California Tax Issues

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    Orange County
    2601 Main St. Penthouse Suite
    Irvine, CA 92614
    (949) 681-3502

    Our headquarters is located in Irvine, CA. Our beautiful 19,700 office space is staffed full-time and always available for our clients to meet with our highly qualified and experienced staff of Attorneys, Certified Public Accountants and Enrolled Agents. We also offer virtual consultations and can travel to meet with clients in one of our satellite offices.

    Outside of our 4 hour initial consultation option, we do not charge travel time or travel expenses when traveling to one of our Satellite offices, or surrounding business districts, where it is necessary to meet personally with taxing authority personnel, make court appearances, or any in person meeting deemed necessary for the effective representation of a client. To make this as flexible, efficient, and convenient as possible, David W. Klasing is an Instrument Rated Private Pilot and Utilizes the Firms Cirrus SR22 to service client’s in California and in the Southwest by air. Offices outside these areas are serviced via commercial jet airlines. None of these costs are charged to our clients.

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    (310) 492-5583
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