Receiving or paying out a personal injury settlement or jury award from your Oklahoma lawsuit? Call Oklahoma City tax lawyer, Travis Watkins, to help you determine what portion of the award or settlement is taxable to you or your employees!

With more tort reform measures going into effect November 1, 2011 from the Oklahoma Legislature I figured it was an appropriate time to talk about recent tax developments concerning lawsuit awards or settlements in Oklahoma.  In case you didn't know, on November 1, 2011, the Oklahoma Legislature capped all non-economic damages at $350,000.

Coincidentally, this deadline also coincides with an announcement from the IRS that it has issued field auditors new guidelines to closely scrutinize these types of awards and settlements.  That means more audits of personal injury (especially) and other plaintiff lawsuits.  Here is a recap of the guidelines that will be in play for these audits.

The general rule is that compensatory damages, which include lost wages received "on account of" personal physical injury are excludable from gross income with the exception of punitive damages.  Rev. Rule. 85-97.  The key here is that there must be some physical element of damages to be non-taxable, either physical injury or physical sickness will do.  The award or settlement must truly "arise out of physical injury" to be excluded from gross income.

Lawsuit proceeds from a non-physical injury are not excludable from gross income.  In other words, you will be taxed on those settlements or awards, including any amounts awarded or discernable in a settlement for punitive damages.  The taxpayer can exclude any actual out of pocket medical costs, unless the taxpayer has already deducted those out of pocket medical costs on his or her tax return.

The IRS will undoubtedly check in these audits to make sure that any amount excluded from gross income statements arise out of physical injury.  Call me if you are an injured person or lawsuit defendant (or a lawyer representing either of these interests, for that matter) dealing with this issue, we would love to help.  Call (405)607-1192 today.