Posted On September 13, 2012

Nevada sex assault or abuse victims: IRS can tax judgments

The last thing Nevada residents likely think about after winning a settlement for sexual abuse is the IRS and tax implications. However, an interesting question is now being posed. Are the judgments given to sexual assault or sex abuse victims actually taxed by the IRS? The majority of people would likely respond with a resounding “no.” However, it is very possible that it could happen.

Under current tax code, any damages a person receives for physical injuries or even sickness are free from being taxed. However, emotional injuries that result in a damage settlement are not tax-free. In a potentially confusing twist, if emotional injuries are triggered by the physical injuries sustained by an individual, then those also become tax-free. Vague language from the IRS has triggered contention in multiple states over the issue of which judgments are taxed and which are not. The IRS has failed to clearly define what actually constitutes either sickness or a person’s physical injuries.

Normally the IRS would want to see physical damage that can easily be observed such as broken bones. However, survivors of sexual assaults often have damages that are not visible. One rule is to keep any evidence related to your claim that could document the injuries. If a settlement has not yet been reached, it would be a good idea to have your payment agreement described as compensation for one’s “personal physical injuries, physical sickness and emotional distress arising out of such physical injuries.” It could also be a very good idea to mention the specific language of the act, whether it was a sexual assault of sex abuse.

This can be a horrifying thing to think about for Nevada residents who are the victims of sexual assault or sex abuse. Once the abuse has ended, many victims simply want to move forward and let go of the painful and traumatic memories associated with the incident. However, being aware of the potential tax implications of a settlement or judgment could avoid future trouble with the IRS. Discussing the terms and ensuring the right language is in the payment agreement could very well help avoid later tax issues or debt arising from taxes or fees.

Source: Forbes, “Are Sexual Assault and Sex Abuse Recoveries Taxed?” Robert W. Wood, Sept. 5, 2012