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Are Sexual Abuse Settlements Taxable?

Are Sexual Abuse Settlements Taxable?

At the end of the sexual assault process, it makes sense to wonder if you will pay taxes for your settlement. It can sometimes get messy when it comes to settlement and sexual abuse settlement, considering the stress that the abused must have gone through. Hence, the need to provide this information to any member of the survivor community who may be looking for answers.

 

Are sexual assault and sexual abuse settlements taxed?

Sexual assault and abuse agreements are not taxable. Under IRC 104a2, a long-standing tax law, you are not required to report or even include personal injury compensation information on your tax return. Therefore, you do not need to pay federal or state income tax on your settlement. The IRS addressed this issue in 2008 to provide clarity to survivors. In a memo from IRS Chief Michael J. Montemurro (ILM 200809001), the IRS assumes there was bodily harm when the abuse took place, even though process and settlement took place several years later (when there probably would be no more observable bodily harm). According to the memo, survivors are not required to prove any physical element in their case for tax purposes. Below is an excerpt from the note.

"You have inquired about the tax treatment of payments made by Entity to settle claims of tort asserted by Claimant (C). C has alleged that Entity's agent(s) X caused physical injury through tort while he was a minor under the care of X. A substantial amount of time has elapsed since the alleged tort occurred. C alleges that he continues to struggle with the trauma resulting from the alleged tort. Because of the passage of time and because C was a minor when the tort allegedly occurred, C may have difficulty establishing the extent of his physical injuries. Under these circumstances, it is reasonable for the Service to presume that the settlement compensated C for personal physical injuries and that all damages for emotional distress were attributable to the physical injuries. Consequently, the Service should concede that compensatory damages paid to settle the claim are excludable from gross income for federal income tax purposes." 

Sexual abuse and sexual assault settlements must involve physical harm and are therefore exempt from tax.


How long does a settlement take?

A settlement can last from a few months to several years depending on the situation. The process of entering into a deal must be followed carefully and correctly in order to find a settlement value. The longer it takes to collect evidence, the longer it will take to receive a settlement offer. That's why it's essential to have a personal injury attorney who has extensive experience with your case and can give you an accurate estimate.

 

What settlement is not subject to taxes?

Below is a list of examples where settlements paid are not subject to tax, depending on the circumstances.


Physical Injuries

Physical damage claims are generally not taxable. This is because you demonstrate "observable physical damage." If the settlement amount is awarded to compensate the plaintiff for any physical damage suffered as a result of the accident, the IRS will not recover any costs. Therefore, the settlement amount will not be counted as income on the tax form. Since it is not income, it won't be taxed. Examples of physical harm include pain, suffering, and emotional distress due to physical injuries resulting from the defendant's negligence.


Medical Expenses

Medical expenses reimbursed through settlement amounts are not taxable and should not be considered as itemized deductions or income. Suppose the settlement is reimbursement for medical expenses after claiming a deduction. In that case, the settlement offer may have to be taxed because the claimant has made a deduction in previous years. To learn more about these types of payroll tax deductions, talk to your personal injury attorney.


Emotional Stress

Any money received due to emotional distress is not taxable. But the emotional distress must have been caused by a physical injury resulting from the accident. If there is no physical harm, the settlement is likely taxable by the state and the IRS. If the claim is based on bodily injury, the settlement offer may not be taxable.


Property Damages

Settlements that reimburse the value of lost property are not taxable. But if the settlement amount is greater than the amount required to replace the property, it would be taxable.


What types of settlement offers are taxable?

Punitive Damages

Punitive damages are the most common in personal injury proceedings and are those intended to set an example for the defendant. Punitive damages are not mandatory and are determined on a case-by-case basis. Punitive damages are taxable and must be reported as income to the IRS. 

Punitive damages should be reported in other income on line 21 of Form 1040. 


Lost Wages

Lost wages received from a settlement offer are taxable, and income tax will be added, particularly subject to Social Security and Medicare taxes. As lost wages are intended to compensate claimants for wages they would have received in previous years, and the amount will be taxable.

 

Summary

The taxes depend on the origin of the claim. If the claim is for any form of bodily injury or sexual abuse, it is probably not subject to tax. If the settlement comes from lost wages, then it is taxable. Emotional distress is taxable if the symptoms are not physical. Punitive damages are always taxable. Legal costs are not deducted from the taxable amount.


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