Lawsuit Proceeds May Be Taxed
If your insurance claim has evolved into a lawsuit, the tax situation gets more complicated, as you could receive several different forms of compensation, all of which may be taxed in different ways.
Just like a normal insurance settlement, compensation for medical bills and repair of property are not taxed in a lawsuit. However, many types of payout that you may receive as a result of a legal settlement are taxable, whether the case is ultimately settled in or out of court. For example, if someone hits you in an auto accident, you wouldn’t be taxed for a payment you receive for your medical bills. However, if the judge also awards you punitive damages, you would have to pay tax on those. If you do receive taxable payment from a lawsuit, you’ll likely receive a 1099 form to use when filing your taxes.
Common taxable payouts from lawsuits include:
Punitive damages
Lost wages
Pain and suffering (unless caused by a physical injury)
Emotional distress