The Tax Questions Blog

Question: Taxes on lawsuit settlement?

After hurricane Katrina, we received no money from our insurance company for our claim. Because of this, we entered into litigation. Eventually we reached a settlement. Our CPA did our taxes and we paid taxes on the settlement (including the portion the attorneys got). Since then, many people (including another CPA) have told us that this should not be taxable. Any comments? We settled out of court with the company - it was not a lawsuit victory.
Is this taxable? The CPA firm is local and handled lots of similar claims and settlements, so we figured they knew the right way to proceed. Is it cut and dried? Is there room for interpretation in this area by different CPAs?
Let me know.

Thanks

Answer: To the extent that it made you whole again it's not taxable. If your reimbursement was for more than your losses, the excess is taxable, as are any punitive damages and accrued interest.

Maybe time to slap the attorney as well. He should have structured it so that his fees were paid directly by the defendant though you can take an itemized deduction for the portion of the fee that represents any taxable reimbursement.

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