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As for the tax treatment of punitive damages, the general rule is that it constitutes taxable income. However, oddly, neither the Code nor the Treasury Regulations provide any guidance as to what constitutes “punitive damages.” The IRS has give limited guidance in Rev. Rul. 85-98.
Although unsettled previously, in 1996 Congress amended section 104 to clarify that punitive damages, whether or not related to a claim for damages arising out of physical injury or sickness, are not excludable from gross income. Consequently, there is incentive for taxpayers to allocate as much of a personal physical injury award to excludable ...
The general rule is all items received constitute “gross income” and are taxed. However, IRC §104 (a) (2) provides an important exception to this rule. 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 ...
Thus, a recovery for back pay is treated in the same manner as salary or wage payments and, therefore, taxable as ordinary income. In contrast to compensatory damages, Congress has clarified that punitive damages, whether or not related to a claim for damages arising out of physical injury or sickness, are not excludable from gross income.
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.
Home » Law Library » Awards and Settlements FAQ » Tax consequences of a recovery from a contract dispute. Generally, recoveries under contract rights are taxable as ordinary income. The reasoning here is that a failure to perform by one of the contracting parties typically gives rise to a loss of ordinary income. Some exceptions exist, however.
incurred but not merely damages that may arise in the future. Additionally, where a court deems it appropriate, a plaintiff may be entitled to recover punitive or exemplary damages. iii. Damages may include additional taxes caused by the malpractice (in certain circumstances), along with interest and penalties.
All businesses except partnerships must file an annual income tax return and must pay tax on income as it is earned or received during the year; this includes attorneys entitled to a portion of any damages award or settlement amount.
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 ...
Typically, an award or settlement contains payments which compensate defendants for a number of different items, such as medical expenses, punitive damages, lost wages, and interest. In order for the tax treatment of a payment to be fully determined, considerable analysis is often necessary to classify and apportion an award or settlement into ...