Asbestos, Acutane, Vioxx, Paxil Settlement? You may need a Tax Attorney!

In Tax Planning by Sarah E. Martello

We have all seen the ads for asbestos exposure and “bad” prescription drugs…

“have you or someone you know taken the drug Acutane… if so, you may be entitled to cash compensation… call 1800-bad-drug…”

So what are the tax consequences of receiving compensation for your damages?

Well, it depends… Some damages and settlement proceeds are tax exempt under IRC § 104(a)(2) while other damage awards or settlement proceeds are fully taxable.

For example, say you sued the brokerage firm that embezzled $200,000 from your account.  The brokerage firm ends up settling and agrees to compensate you $300,000.  Initially, It may appear that you have recovered your original loss of $200,000, plus an additional $100,000 for the hassle and headache of the whole ordeal.  As you can see from the illustration, your bottom line will not look so rosy.

Thus, if you receive compensation from another party by virtue of filing a lawsuit, qualifying as member of a class action, or become entitled to a payout from an existing settlement fund, ask your attorney about the tax consequences.

Here’s a further rundown of the basics, thanks to Law.com:

5 Things Every Plaintiffs Attorney Should Know About Tax Law

While tax law may seem dull and irrelevant to most attorneys’ day-to-day practice, in order to better serve their individual clients, plaintiffs attorneys should always keep the following five basic tax laws in mind, and advise their clients accordingly.

  1. Attorney Fees Are Taxable
  2. Awards for Personal Physical Injuries Are Exempt From Tax
  3. Insurance Proceeds
  4. Lump Sum or Structured Settlement Payments
  5. Reporting of Awards