You have likely heard that Illinois residents are receiving up to $400 in compensation from the Facebook Biometric Information settlement. The courts finalized the settlement and began distributing checks in May 2022, for claims filed in 2021.  Settlements like this are becoming more common; every day you hear of privacy lapses or breaches at large corporations which in many cases result in a class-action lawsuit. Most of these scenarios produce small settlements (or none at all) but with the Facebook Biometric settlement, the compensation amount was sizable. Our instinct is to cash the check without giving it a second thought. But what are the tax ramifications of these payments?

In short, most items are presumed taxable unless the tax code specifically indicates otherwise. Therefore, most of the settlements you hear about or benefit from will most likely be taxable events. 

There are a few different types of damages that the IRS has commented upon, some of which are excluded from being reported as income.  Below is a short listing of different types of damages and tax ramifications.

Receipt of damages due to the of the following are excludable from income:

• Physical injury or physical sickness
• Wrongful death
• Emotional distress, but only up to the extent of related medical care
• Wrongful incarceration

Damages and settlements received for the following are taxable:

• Employment discrimination
• Sexual harassment
• Punitive damages
• Other damages
  
  

As you can see, most damages excluded from income tax deal with a clear physical injury, sickness, or wrongful death.  In terms of emotional distress, the tax code gives special consideration and damages would be excluded up to the amount of any medical costs incurred as a result of the distress.  Any additional amount received above the medical costs would be taxable. 

The IRS has made it clear that any punitive damages, even if it is for physical injury, would be taxable.  For wrongful death, the taxation of punitive damages is dependent on state law.

Other damages not specifically excluded by the IRS would be taxable.  

Damages, legal settlements, and legal expenditures can get complicated. Cray Kaiser is here to help you determine the taxation on your damage award, just give us a call at 630-953-4900.