As your sexual abuse lawsuit is concluding, it makes sense to wonder if you’ll be taxed on your settlement. In my opinion, no. Over nearly three decades in the settlement planning space, I have heard and seen advice from tax experts on hundreds of sexual abuse and assault cases, none of which resulted in taxable settlements*. I feel compelled to provide this info to anyone in the survivor community who may be searching for answers. There are tax attorneys and CPAs who would gladly charge for the same opinion. My team aims to provide cost-effective information as stakeholders in civil justice and the survivor community.
Are sexual abuse and assault settlements taxed?
Sexual abuse and assault settlements are tax exempt. Under IRC 104a2, a long-standing tax law, you do not need to declare or even put any information regarding a personal injury settlement on your tax return. Therefore, you do not need to pay federal or state income taxes on your settlement**. The IRS tackled this issue in 2008 to provide clarity to survivors. In a memorandum by Chief of the IRS, Michael J. Montemurro (ILM 200809001), the IRS assumes that there were personal physical injuries when the abuse happened – even though the lawsuit and settlement followed many years later (when there would likely be no more observable bodily harm). Pursuant to the memo, survivors do not have to prove any physical elements of their cases for tax reasons. Below is an excerpt from the memo.
“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.” Read the full text here.
Sexual abuse and sexual assault settlements are assumed to involve physical injuries and are therefore tax exempt.
Our firm is an advocate and ally to survivors, not only through expert settlement planning, but also by providing access to information. There are many experts who, in our opinion, use “gray areas” in taxation for their own business justification. As a survivor with an incoming settlement, you may not need to pay for this opinion on the taxation of your settlement; rather, you may be able to give this post to your usual tax advisor as a basis for conversation and advice*.
I have questions about my sexual abuse settlement. What can I do?
We welcome you to contact Milestone if you have financial questions about your sexual abuse settlement. Our team is trauma informed and has helped many survivors navigate the complexities of settlement and secure their financial futures. We know that your journey does not end at the conclusion of your lawsuit. That’s why we provide the right information and any helpful resources we have available. You can visit our page for survivors, and feel free to call (716) 883-1833 or email email@example.com to speak with one of our settlement experts.
*This post does not constitute tax advice. We are not a certified public accountancy or a law firm specializing in tax.
**If your case went to verdict in a state or federal court, the only portion of your settlement that would be taxable are pre- and post-verdict interest or any punitive damages awarded.
A West Point graduate where he served as captain and military aviator, John Bair continues his commitment to our country through his efforts within the settlement planning industry. He has represented families of victims lost in the Flight 3407 crash, offered pro bono services to the families of 9/11 victims and drafted the first consumer protection bill for plaintiffs (H.R. 3699).