For taxable settlements, use a Plaintiff Recovery Trust or origin-of-claim allocation to avoid attorney fees being taxed to plaintiff.
In taxable settlements (employment discrimination, defamation, non-physical), Commissioner v. Banks (2005) held plaintiff must include gross recovery in income; TCJA suspended miscellaneous itemized deductions — attorney fees became non-deductible. Solutions: (1) §62(a)(20) above-line deduction for civil rights/whistleblower/discrimination cases, (2) Plaintiff Recovery Trust that owns claim and pays attorney directly (contested but growing), (3) allocate portion of settlement to §104(a)(2) if any physical injury, (4) qualified §501(c)(3) donor-advised charitable set-aside.
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Damages 'on account of' personal physical injury or physical sickness are 100% excluded from gross income.
Structured PI settlement pays tax-free installments for life via a qualified assignment — better than lump-sum + investing.
Depositing settlement into a §468B QSF lets plaintiffs delay constructive receipt while negotiating allocations and structures.
Plaintiff attorneys can structure their contingent fee via §130 QAssignment — deferring tax to payment years.
If emotional distress ORIGINATES from a physical injury, entire settlement is tax-free — even the emotional portion.
IRC §62(a)(21) allows above-line deduction for attorney fees on federal whistleblower recoveries — full net-of-fees tax.
MSA earmarks portion of PI settlement for future Medicare-covered care so plaintiff doesn't lose future Medicare eligibility.
Forced to repay income taxed in a prior year? §1341 lets you deduct now OR recompute prior year — take the bigger benefit.