Lawsuits can settle immediately after a complaint is filed or several years into the litigation process on the eve of trial, or even during the course of a trial. Most cases will settle before a final resolution is determined by a judge or jury. Settlements generally offer a more favorable resolution than trial for several reasons: (1) both parties avoid the risk of loss at trial, (2) both parties avoid the considerable costs, time, and efforts involved in further litigation and trial, and (3) both parties avoid protracted appeals.
Both parties in a suit seeking monetary damages should consider tax implications in agreeing upon a settlement. This is true for defendants (the party who is being sued) and plaintiffs (the party who filed the lawsuit) since the defendant may need to make tax deductions prior to disbursement to the plaintiff and/or a plaintiff may need to include some types of settlement proceeds as taxable income. Further, a defendant may need to issue a 1099 to the plaintiff along with the disbursement of settlement funds. These determinations are highly fact-sensitive and every party should consult their own CPA or other tax professional who would be most familiar with each parties’ particular situation.
Generally, settlement money received for a personal physical injury is not taxable. (There are exceptions, but this is the general rule.) However, it is important to take into consideration that the settlement amounts may be subject to reimbursement to Medicaid/Medicare or medical insurance. Indeed, the Social Security Act requires that Medicare payments be reimbursed by a subsequent lawsuit recovery, such as a settlement or award.