Question

Taxpayer is involved in a lawsuit. She sues for emotional distress because defendant made disparaging remarks about her. She is awarded $100,000. She pays her attorney a $30,000 legal fee. How does she report the $100,000 judgment? How does she report the amount paid to her attorney?

Answer 1

Money received on judgment of physical injuries or physical sickness is tax free while on emotional distress judgment is taxable, here is a very thin line of difference between the two since physical illness after the emotional distress can be tax free but it should be proved before court in the sequence of occurrence, If there is only emotional distress and $100,000 is received on judgment then income of $100,000 to be reported in tax form and legal fees of $30,000 paid to attorney will form miscellaneous itemized deduction that is subject to various limitations.