Sexual Harassment Damages | How to Mitigate the Tax

Many sexual harassment settlements will be taxable, or have taxable damages elements. After paying attorney fees and applicable federal state and local income taxes, it could leave a third or less to the victim depending on their attorney's contingency fee agreement.

What Did the 2017 Tax Cut and Jobs Act Do?

In December 2017, the Tax Cuts and Jobs Act was passed, which eliminated the tax deduction for confidential sexual harassment settlements and payments related to sexual abuse or harassment that are subject to nondisclosure agreements. However, the law did not change the tax treatment of these settlements and payments for the recipients.

Generally, compensation received as a result of physical injuries or sickness is not taxable, and this includes settlements and awards related to sexual assault or sexual abuse that result in physical injuries or sickness. However, if a portion of the settlement or award is for emotional distress or mental anguish and is not related to physical injuries or sickness, that portion may be taxable.

For those with taxable damages, or with an element of taxable damages, agreeing to a non qualified structured settlement offers significant advantages.