Harassment Claim Settlement Taxable

[Lee B]

"The tax treatment of legal settlements can be confusing for individuals who receive them, especially when they involve employment-related claims. One such issue was the subject of the Tax Court case Montes v. Commissioner,[1] which examined whether payments from an employment suit could be excluded from income."

https://www.currentfederaltaxdevelopments.com/blog/2023/6/30/firefighters-settlement-payment-related-to-harassment-claim-did-not-qualify-for-exclusion-from-income

[Terry D EA]

Interesting and good read. I always thought the code was pretty straight forward on this issue. About midway through the reading, I began to question the emotional distress as a possible injury. Also, I can side with the CPA for thinking the same thing. But... after reading further I think the judge was correct.  I guess you can say she filed the suit honestly, relied on the CPA's advice hence the statement, "the advisor made a mistake". 

On another note, in January, I sat in a mediation to settle a lawsuit for our middle daughter for a dog bite. The dog did enough damage that she has lost a significant amount of use of her left arm and hand which is her dominant hand. We discussed the taxability of her settlement with the attorney. I did state this was a clear case of injury that was permanent and not to be included in her taxable income. This article made me rethink this whole scenario.