Lawsuit Settlement Tax Calculator
Estimate federal tax and net proceeds based on what the settlement replaces—not merely what the agreement calls the payment.
Estimated net proceeds
$46,574Estimated total federal tax
$23,426Excluded from income
$0- Gross settlement
- $100,000
- Attorney-fee deduction modeled
- $30,000
- Federal income tax
- $16,018
- Employee payroll tax
- $7,408
Federal estimate only. Settlement wording and claim allocation control the result. Mixed settlements should be split by component; state tax, credits, AMT, prior medical deductions, and the narrow wrongful-death punitive-damages exception are not modeled. For property damage, any recovery above basis is stacked as ordinary income only for a rough estimate; the actual gain character and involuntary-conversion rules can change the tax.
Federal treatment by settlement component
| Component | Typical federal treatment |
|---|---|
| Compensatory physical injury or sickness | Generally excluded, except punitive damages and recoveries of previously deducted medical expenses. |
| Nonphysical emotional distress | Generally taxable; qualifying related medical costs not previously deducted can reduce inclusion. |
| Employment lost wages | Taxable wages, generally subject to withholding and employee Social Security and Medicare taxes. |
| Business lost profits | Taxable business income and potentially self-employment tax. |
| Punitive damages and interest | Generally taxable even when connected to an otherwise excluded physical-injury recovery. |
Frequently asked questions
Are lawsuit settlements taxable?
Federal law starts with a broad rule that damages are taxable unless an exclusion applies. Compensatory damages received because of personal physical injury or physical sickness are generally excluded. Punitive damages, interest, employment lost wages, business lost profits, and most nonphysical injury awards are generally taxable.
Are emotional distress damages taxable?
Generally yes when the distress did not originate from a physical injury or physical sickness. The taxable amount can be reduced by related medical expenses that were not previously deducted and for which the payment compensates you.
Can I deduct attorney fees from a settlement?
Not always. Certain unlawful-discrimination, federal-government, and qualifying Social Security claims can receive an above-the-line deduction under IRC section 62, capped at the settlement amount included in income. Ordinary and necessary business legal fees may be deductible. Many personal claims do not receive a federal attorney-fee deduction even when the lawyer is paid from the award.
Are lost wages in an employment settlement subject to payroll tax?
Yes. The wage portion is generally subject to federal income tax withholding and Social Security and Medicare taxes. The calculator estimates employee payroll tax based on wages already earned.
How is a property-damage settlement taxed?
A recovery generally is not income up to the damaged property's adjusted basis, but it reduces that basis. Amounts above basis can produce taxable gain. This calculator shows the excess but does not classify the gain or model involuntary-conversion relief.
Sources
Related Calculators
Severance Tax Calculator
Supplemental wage withholding, FICA, state tax on separation pay
Federal Income Tax Calculator
10–37% brackets, $15,750 standard deduction, progressive calculation
Self-Employment Tax
15.3% on 92.35% net, 12.4% SS to wage base, deductible half
Capital Gains Tax Calculator
LTCG 0/15/20% rates + 3.8% NIIT based on income brackets