- Legal settlements are taxable in most cases.
- The IRS taxes legal settlements by including them as income.
- There are some instances where settlements are tax exempt.
There is an exception where you may not need to pay tax when you receive a legal settlement.
A legal settlement is an amount of money you (plaintiff) receive after filing a lawsuit against another person, company or group of people (defendant). The amount of money is to cover physical and emotional damages. If you file a lawsuit for loss of property then the proceeds of the settlement will help you cover those costs.
A plaintiff is the party filing a lawsuit and a defendant is the party defending their side of the story.