The Tax Implications of Sexual Abuse Settlements

As an expert in tax law, I have seen firsthand the financial struggles that victims of sexual abuse face. It is a pervasive problem that affects millions of people around the world, regardless of gender, age, or social status. And at the end of the long and difficult road to recovery, many survivors are left wondering if they will have to pay taxes on their settlement. It's a complicated issue, especially when it comes to settlements for sexual abuse. The stress and trauma that survivors have endured make it crucial to provide clear information on the tax implications of these settlements.

For companies being sued, legal agreements are typically tax deductible, including legal fees. The only exception is when legal fees are capitalized to obtain an asset, such as buying one company from another or purchasing real estate. Even legal fees related to conduct that is not tax-deductible, such as negotiating with the government to pay a criminal fine, can still be deducted. And surprisingly, even punitive damages are tax-deductible for businesses, regardless of how heinous the conduct may be. While Congress has proposed eliminating this tax deduction for punitive damages, none have been approved. But what about survivors who file lawsuits? Will they have to pay taxes on their settlement? While personal injury lawsuits are typically not taxable, it can be challenging to prove that a physical injury occurred in a sexual abuse situation that may have happened years ago.

And with sexual abuse settlements becoming more common in cases involving clergy, athletes, scouts, and other settings, the tax treatment of these recoveries remains unclear. In most cases, the claims process for these settlements is slow and bureaucratic, with the possibility of receiving a cash award. But what does the victim actually receive when they "win"? In most cases, it's money and a sense of closure. However, for many survivors, this financial compensation also brings about tax concerns. Can the IRS tax this money?The answer is nuanced and adds even more distress to the victim's experience.

Tax laws are not black and white, and the stakes can be significant. After going through a traumatic experience and finally reaching a settlement or judgment, the last thing anyone wants is to be uncertain about taxes. No one wants to pay taxes if they don't have to, but they also don't want to face complaints from the IRS or state tax authorities years later, which can result in additional interest and fines. And if the victim has not saved enough from their settlement to cover any potential tax disputes, it can be devastating. The law needs to be clarified to ensure that these recoveries are not subject to taxation.

Generally, compensation received for physical injury or illness is not taxable, including settlements and compensation related to sexual assault or abuse that results in physical injury or illness. However, if a portion of the settlement or award is for emotional or mental distress and is not related to physical injury or illness, that portion may be taxable. Under current tax laws, agreements and awards related to sexual harassment or abuse are generally not taxable. Some defendants may be willing to give up confidentiality or allocate a specific amount of money for sexual harassment or abuse in order to deduct it from their taxes. But it's essential to be cautious as tax laws in this area are still evolving, and there may be future cases where defendants try to cancel all or a significant portion of their settlement for sexual harassment and legal fees in order to defend themselves. Calculating the amount of a settlement for sexual abuse is a complex and delicate process that takes into account various factors.

For example, in a recent case involving a school district, victims who were now in their 30s filed a sexual abuse lawsuit against the district, alleging neglect and lack of protection against teacher abuse that persisted until their second year of high school. The problem with compensation agreements for sexual harassment and abuse is the tax treatment of these agreements. In a recent case involving Peters Massage Spa and its owner, a massage therapist employed at the spa was accused of sexually assaulting six women over nine months. If you have received a settlement for sexual harassment or abuse, it is essential to consider filing a federal and state tax refund for your injuries. Among the plaintiffs in this case, one reported being abused at the age of 5, while another alleges that they were physically assaulted by staff for reporting sexual abuse. The media has been filled with stories of sexual harassment and abuse in every corner of American society, highlighting the need for clarity in tax laws surrounding these issues.

Ernest Carsten
Ernest Carsten

Hardcore beer fan. Unapologetic troublemaker. Avid coffee guru. Total bacon lover. Devoted travel fanatic. Professional music buff.