White Paper

22 Pages
  • 22 Pages

Latest Guidance on the Tax Treatment of Settlement and Damage Awards


Sexual harassment in the workplace could be mental, physical or even both.

For years, confusion and litigation abounded about the taxability of damages for nonphysical injuries such as gender and age discrimination or in harassment cases. When the Small Business Job Protection Act was signed into law in 1996, years of litigation ended by stating that punitive damages are not excludable from gross income. The legislative history of the 1996 Act, as it related to IRC section 104(a)(2), provided useful insight into what was or was not excluded from taxable income because of "physical injuries or physical sickness". However, if the primary injury is not physical, then the resultant damages are not excludable even if the action caused emotional distress. In a sexual harassment suit, there might be no or little physical contact so the plaintiff will more than likely pay tax on their recovery. This white paper reviews the tax treatment of legal fees, the above-the-line deduction for legal fees, and where we are at now with the taxation of damage awards.



Martin H. Abo, CPA, ABV, CVA, CFF

Martin H. Abo, CPA, ABV, CVA, CFF

Abo and Company, LLC

  • Manager and founding member of Abo and Company, LLC Certified Public Accountants
  • Co-managing member of Abo Cipolla Financial Forensics, LLC, an affiliate of the core accounting firm exclusively providing expert witness testimony on financial matters and other litigation support services and business valuations
  • Has comprehensive experience in individual and corporate financial, business, and tax planning
  • The majority of his business clients are closely held businesses and professional service firms needing advice and guidance on evaluating the enterprise and establishing/maintaining sound business and financial practices that are also practical
  • Has been providing such services for lawyers and law firms of various sizes and other enterprises covering many industries; clients, as well as the banking, insurance, legal and general business communities, continue to call upon him to provide unbiased consulting assistance, business valuations, and dispute resolution
  • Holds the professional designation of certified valuation analyst from the National Association of Certified Valuation Analysts and has been awarded the designations of ABV, Accredited in Business Valuation, and CFF, Certified in Financial Forensics, by the American Institute of Certified Public Accountants
  • Volunteers time and expertise to many other business and professional organizations including serving as a director of Deborah Hospital Foundation; an active member and served as president of the Estate and Financial Planning Council of Southern New Jersey; is an active member and served as a director of the Chamber of Commerce of Southern New Jersey; serves on the Matrimonial Accounting Interest Group of the NJSCPA
  • Director and treasurer of Exit Planning Exchange-Philadelphia (XPX), whose members include estate planning attorneys, CPAs, investment bankers, wealth management advisors, commercial lenders, executive coaches, M&A attorneys, marketing, and management consultants as well as former business owners who now advise fellow business owners on exit planning
  • Can be contacted at 856-222-4723 or [email protected]

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