When is a settlement considered taxable income?

In North Carolina, settlements from accident law are considered taxable income when it constitutes ordinary income. This includes compensations for physical injury or illness, including wages lost due to the injury or illness. Other forms of compensations, such as punitive damages or damages for emotional distress, are generally not considered taxable income. In addition, settlements received as a result of legal action may not be taxable income, depending on the circumstances. In situations when the plaintiff pays for all attorney fees, court costs, and other expenses related to the case out of pocket, then the settlement received from the defendant is typically non-taxable. This normally applies to out-of-court settlements. However, if the plaintiff’s attorney is paid with a percentage of the settlement, then the full amount of the settlement is considered taxable income. This means that the plaintiff must pay taxes on the full amount of the settlement, not just the portion that was awarded to them. It is important to note that there are also other taxes that may apply, such as estate taxes or income taxes on the investment of any proceeds from the settlement. It is best to consult a qualified tax professional to better understand which taxes may apply in your particular situation.

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