Tax Consequences – Punitive Damages
The personal injury damages awarded by the jury were $5M, which are tax free. The punitive damages were $16.5M which means a windfall for the IRS. That’s right, the entire $16.5M is taxable and the attorney fee, which is normally contingent for personal injury cases (30-40% contingent fee), will be challenging to deduct. That means the IRS will get the largest share of the $16.5M and the attorney will get a large cut as well.
Shockingly, it pays to evaluate the tax implications into your legal decisions when the punitive awards could create a huge tax bill.
As you might suspect, Holland America Cruise has appealed the verdict so a settlement for a amount less than $21.5M, but a higher award for personal injuries (higher than $5M) may be a win win solution.