Is a a legal settlement of $20,000 tax deductible?
It depends. Add a comment if you have more details or questions.
To determine if settlement amounts you receive by compromise or judgment must be included in your income, you must consider the item that the settlement replaces. The character of the income as ordinary income or capital gain depends on the nature of the underlying claim. Include the following as ordinary income.
Interest on any award.
Compensation for lost wages or lost profits in most cases.
Punitive damages, in most cases. It doesn't matter if they relate to a physical injury or physical sickness.
Amounts received in settlement of pension rights (if you didn't contribute to the plan).
Back pay and damages for emotional distress received to satisfy a claim under Title VII of the Civil Rights Act of 1964.
Attorney fees and costs (including contingent fees) where the underlying recovery is included in gross income.
Do not include in your income compensatory damages for personal physical injury or physical sickness (whether received in a lump sum or installments).
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