When the negligence of another injures you, there are different types of damages that you can pursue. You can seek compensatory damages or punitive damages. However, it’s unclear whether these particular types of damages are taxable. Here, we will explore whether compensatory or punitive damages are taxable under the tax law.
What Are Punitive Damages?
Punitive damages are civil damages awarded to punish the defendant for their actions and deter future similar behavior. To be eligible for punitive damages, you must prove that the defendant’s actions were willful or reckless.
What Are Compensatory Damages?
Compensatory damages are awarded to compensate the plaintiff for their losses. These losses can be either financial, such as medical bills or lost wages, or emotional, such as pain and suffering. The amount of compensatory damages awarded will depend on the severity of your losses.
Are Punitive Damages Taxable?
Punitive damages are not considered taxable income if the intention is to punish the defendant for their actions. But if there’s any income involved, the IRS typically treats punitive damages as taxable income. Plaintiff will owe federal, state, and local taxes on any money received. As a result, it is vital for anyone who receives punitive damages to consult with a tax expert to ensure they comply with the law.
Are Compensatory Damages Taxable?
Compensatory damages are awarded to restore the plaintiff to their pre-injury status by awarding an amount of money that will put them back in the same position they would have been in if the injury or harm had not occurred. Given this purpose, the Internal Revenue Service (IRS) does consider compensatory damages to be taxable income.