Settlement vs. court awarded judgement for taxes

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Settlement vs. court awarded judgement for taxes

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A settlement is often better than a court awarded judgment because there is greater flexibility for documenting and characterizing payments (i.e. whether to characterize them as partly punitive). There is generally more favorable tax treatment of non-punitive damages a plaintiff receives. This is because Section 104(a)(2) provides a broad exclusion from gross income for non-punitive damages received “(whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness.” Fortunately, for plaintiffs, as a practical matter, defendants rarely, if ever, desire to characterize the payments as punitive.