Settlement Tax Calculator

We are currently in the process of improving our Settlement Tax Calculator.

In the meantime, we would be happy to run a custom settlement tax analysis for you. You can book a free 15-minute call with us at your convenience using the scheduling tool below:

Intro to the Settlement Tax Calculator

Receiving a settlement can be a complex process, especially when it comes to understanding the tax implications. 

That’s why we’ve developed the Settlement Tax Calculator – an innovative tool that provides a customized estimate of the taxes you might owe on your settlement amount based on factors like your State’s income tax rate, attorney’s fees, and more. 

More importantly, the calculator also demonstrates how you can significantly increase the amount that you get to keep in your pocket by using some proactive tax planning strategies like a structured settlement annuity and the Plaintiff Recovery Trust. The Settlement Tax Calculator shows you how using one (or both) of these options can work in your favor.

Whether your settlement is tax-free and you’re looking to grow your settlement tax-free, or if your settlement is taxable and you’re looking to avoid losing a large portion of the settlement to taxes, the Settlement Tax Calculator is an essential first step in planning your financial future post-settlement.

To learn more, check out the Frequently Asked Questions section below.

Frequently Asked Questions

How do I use the Settlement Tax Calculator?

  1. Click the “Get Started” button above.
  2. Enter details about your settlement.
    • Choose the case type. If you’re unsure which “Case Type” your case falls under, please select “Other”.
    • Select the State that you reside in.
    • Enter the estimated total gross amount of your settlement. If you’re unsure of the amount, please enter $1,000,000. While your settlement may not be $1,000,000, using this estimated amount will make it easier for you to see the benefits of the tax planning options available to you.
    • Enter your attorney’s contingent fee percentage. If you’re unsure of your attorney’s contingent fee percentage, please enter 40%.
    • Click “Go to Next Step”.
  3. Provide your name and email so we can send the results to you once they become available.

Is my settlement taxable?

Determining whether your legal settlement is taxable involves understanding the nature of the claim and the specific details of your settlement. Generally, the taxability of a legal settlement depends on the “origin of the claim” rule, which means the taxation is based on the underlying reason or cause for your lawsuit. Here are some general guidelines:

1. Personal Physical Injury or Physical Sickness Settlements:

Generally, if your settlement is a compensation for personal physical injuries or physical sickness, it is not taxable. This includes amounts received for medical expenses, pain and suffering, and loss of income due to the physical injury or sickness.

However, punitive damages and interest received are taxable, even if they are part of a personal physical injury settlement.

2. Employment-Related Settlements:

Settlements for lost wages, back pay, or severance pay are typically taxable as ordinary income.

Discrimination, retaliation, or unlawful termination settlements are also taxable.

Whether or not attorney fees are deductible on the plaintiff’s tax return depends on the specific details of each case.

3. Other Settlements (e.g., Professional Malpractice, Defamation, Emotional Distress, Breach of Contract, etc.):

Settlements for other claims, like defamation, breach of contract, professional malpractice, or emotional distress not caused by a physical injury, are usually taxable.

4. Punitive Damages:

Punitive damages are taxable regardless of the nature of the lawsuit.

5. Interest:

Interest on any settlement is typically considered taxable income.

It’s important to carefully analyze the specific elements of your settlement to determine the taxation of your settlement.

To learn more about this topic, we’ve prepared a comprehensive overview that can help you determine if your settlement is taxable.

If my settlement is for a personal injury, is it still taxable?

Settlements for personal physical injuries or physical sickness are generally not taxable under Section 104(a)(2) of the Internal Revenue Code. 

This means that if your settlement is compensation for a personal physical injury or physical sickness, the amount you receive is typically excluded from your gross income, and you do not have to pay taxes on it.

This tax-free status applies to amounts received for:

  • Medical expenses related to the physical injury or sickness.
  • Pain and suffering that results from the physical injury or sickness.
  • Lost wages due to the physical injury or sickness.

However, it’s important to note a few key points:

Punitive Damages: If your settlement includes punitive damages (which are intended to punish the defendant rather than compensate you for your injuries), this portion of the settlement is generally taxable, even if the rest of your settlement is related to a personal physical injury.

Emotional Distress or Mental Anguish: If your settlement includes compensation for emotional distress or mental anguish not originating from a physical injury or sickness, this portion may be taxable. However, if emotional distress or mental anguish results directly from the physical injury or sickness, it might be considered part of the tax-free settlement.

Interest: Any interest on the settlement is typically considered taxable income.

To ensure proper tax treatment, it’s crucial to have clear documentation and allocation of the settlement amounts, especially if your settlement includes different types of damages.

The “origin of the claim” rule is key in determining tax liability.

You can learn more about how the “origin of the claim” rule determines taxation, as well as other common questions about settlement taxes, in this article.

Are punitive damages or interest from a personal injury case taxable?

Yes, punitive damages and interest from a personal injury case are generally taxable.

Punitive Damages: While compensatory damages for a personal physical injury or physical sickness are typically tax-free, punitive damages are treated differently. Punitive damages are intended to punish the defendant for their actions, not to compensate the plaintiff for a loss. As such, punitive damages are considered taxable income by the IRS, even if they are awarded in conjunction with a non-taxable personal injury settlement.

Interest: Any interest on the settlement, such as pre-judgment or post-judgment interest, is also typically taxable. This type of interest is considered income by the IRS, as it represents the compensation for the time value of money that was held up due to the lawsuit proceedings, rather than direct compensation for a physical injury or sickness.

Even if the underlying lawsuit is related to personal physical injury and the compensatory part of the settlement is tax-free, both punitive damages and interest are subject to taxation. It’s important to clearly understand and document the different components of your settlement to ensure proper tax treatment.

If my settlement is taxable, can I deduct attorney fees?

Whether you can deduct attorney fees from a taxable settlement depends on the type of case and the specific tax laws in effect. Generally, the ability to deduct attorney fees has been significantly impacted by the Tax Cuts and Jobs Act of 2017. Here’s a breakdown of the general rules:

Employment Cases: For employment discrimination cases based on the plaintiff being a member of a protected class (e.g., age, race, gender), retaliation cases, or certain whistleblower claims, plaintiffs can usually deduct attorney fees “above the line.” This means plaintiffs can subtract these fees from their gross income, potentially reducing the taxable portion of their settlement.

If the employment lawsuit is not related to discrimination or retaliation based on being a member of a protected class (such as race, color, religion, sex, national origin, age, disability, etc.), then the legal fees may not be deductible. 

For instance, cases solely involving breach of contract, severance pay disputes, or personal disputes without a discrimination or retaliation component typically do not qualify for legal fee deductions.

Other Types of Cases (Including Professional Malpractice, Defamation, etc.): For most other types of cases, the Tax Cuts and Jobs Act of 2017 removed the ability for plaintiffs to deduct their attorney fees. 

Consequently, plaintiffs must pay tax on their total gross settlement amount, including the portion paid to attorneys as fees. This situation is often referred to as the “Plaintiff Double Tax Trap,” where the same income is effectively taxed twice—once for the plaintiff and once for the attorney.

Plaintiff Recovery Trust: One strategy to address this issue, particularly in cases where attorney fees are not deductible, is to use a Plaintiff Recovery Trust. This tax planning tool can help plaintiffs avoid the Plaintiff Double Tax Trap by allowing them to pay taxes only on the net amount they receive after attorney fees. 

To learn more information about how 5 common case types are taxed, check out this article.

Is there any way to avoid paying taxes on the total gross settlement amount if I can’t deduct legal fees?

Absolutely! The one viable solution that can help you avoid paying taxes on the attorney fee portion of their settlement is called the Plaintiff Recovery Trust.

The Plaintiff Recovery Trust allows you to exclude the portion of the settlement that is paid out as attorney’s fees from your taxable income. This means you only pay taxes on the net amount you receive, not on the gross settlement amount.

This powerful tax planning tool can help plaintiffs double, or even triple, their after-tax net recovery in cases where legal fees would otherwise not be deductible.

To get a customized projection of how much money you might be able to keep post-settlement when using the Plaintiff Recovery Trust, click the “Get Started” button above to start using our Settlement Tax Calculator. 

Is there any other way to pay less in taxes besides the Plaintiff Recovery Trust?

Yes. A structured settlement annuity is one of the most common—and powerful—tax planning strategies we use with plaintiffs across the country.

We often recommend this tax planning tool to plaintiffs who are looking to increase their after-tax net settlement. 

This strategy allows you to receive your settlement in periodic payments over time instead of a lump sum. By spreading the taxable income over several years, you may benefit from a lower marginal tax rate each year, compared to receiving the entire taxable amount in one year and being taxed at a higher rate.

A structured settlement annuity works in all case types and regardless of whether the plaintiff can deduct legal fees or not.

Can the Plaintiff Recovery Trust be combined with a structured settlement annuity?

Yes, the Plaintiff Recovery Trust can be combined with a structured settlement annuity to maximize tax savings and financial benefits. 

Each of these tools addresses different aspects of tax liabilities and when used together, they can offer a comprehensive solution to minimize taxes and provide a stable income stream over time. Here’s how they can work together:

Plaintiff Recovery Trust: The Plaintiff Recovery Trust is designed to avoid the Plaintiff Double Tax Trap by ensuring that you, as the plaintiff, are not taxed on the portion of the settlement that goes to pay attorney fees in cases where such fees are not deductible. This tool effectively reduces your taxable income to the net amount you receive after attorney fees.

Structured Settlement Annuity: A structured settlement annuity allows you to receive the settlement in periodic payments rather than a lump sum. This can spread the taxable income over several years, potentially keeping you in lower tax brackets each year and reducing your overall tax liability. Additionally, the funds in the annuity earn a return on a tax-deferred basis.

When combined, these tools can offer the following benefits:

  • Tax Efficiency: The Plaintiff Recovery Trust reduces the taxable portion of the settlement by excluding attorney fees. The structured settlement annuity further manages tax liabilities by spreading the taxable income over multiple years.
  • Financial Security: The annuity provides a predictable stream of income over time, which can be particularly beneficial for managing future expenses and providing financial stability.
  • Flexibility: The payment schedule of the structured settlement annuity can be tailored to meet your specific financial needs and goals, providing flexibility in how you receive and use your settlement funds.

Our proprietary Settlement Tax Calculator can help give you an idea of how much money you will be able to keep post-settlement when using the Plaintiff Recovery Trust (if applicable) and a structured settlement annuity. Click the “Get Started” button above to begin.