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Generally, settlement funds and damages received from a lawsuit are taxable income ing to the IRS. Nonetheless, personal injury settlements ? specifically those resulting from car accidents or slip and fall incidents ? are typically exempt from taxes.

If you're involved in a lawsuit in California, you may be wondering whether any settlement or award you receive is taxable. The good news is that, in most cases, personal injury settlements are not taxable in California.

The general rule is that lawsuit settlements are taxable, except in cases that involve an actual, physical injury (?observable bodily harm?) or illness that you suffered. In other words: personal injury settlements usually aren't taxable, while other types of settlements usually are.

The general rule regarding taxability of amounts received from settlement of lawsuits and other legal remedies is Internal Revenue Code (IRC) Section 61. This section states all income is taxable from whatever source derived, unless exempted by another section of the code.

A structured settlement is an arrangement in which the settlement payment is paid out over time, rather than in a lump sum. This can help to avoid taxes on the settlement payment by spreading out the tax liability over a longer period of time.

Settling a Debt May Increase Your Taxable Income That additional income might also push you into a higher tax bracket, resulting in a larger tax bill.

Do a schedule of loss if you haven't already. Explain why you think you have a good claim. However don't exaggerate things ? that can make it difficult to reach a settlement. Be prepared to make the first offer and to make counter-offers if you reject an offer that your employer has made.