The tax treatment of a personal injury settlement or judgment can have a significant economic impact on the parties. For obvious reasons, if a recovery is exludible from income, the economic consequences may be far easier for a client to bear. On the other hand, if a recovery is fully taxable or the client’s attorneys’ fees are not fully deductible, an otherwise successful outcome may be less than desirable. Unfortunately, lawyers often overlook the tax consequences of settlements and judgments and, as a result, fail to engage in timely and meaningful tax planning. Consequently, this article offers several tips for plaintiffs’ attorneys regarding the taxation of damage awards.
- Get Educated - Failure to advise clients about the tax consequences of litigation creates malpractice liability.
The tax consequences of a settlement or judgment are relevant in almost every case. Thus, it is not surprising that malpractice claims often arise from the alleged failure of an attorney to advise his or her clients about the tax consequences of litigation. An attorney familiar with the general principles applicable to the taxation of settlements and damage awards is better equipped to spot potential tax
traps and reach out to tax professionals when necessary.