Tax Consequences of Employment Discrimination Settlements, 12 Colo. Law. 1804 (Nov. 1983)
As a general principle, any amount received in settlement of a claim of employment discrimination will be considered by the IRS to be taxable income. In order to exclude a portion of the settlement from taxation, the taxpayer will bear the burden of proving that at least a portion of the settlement was in settlement of claims for personal injury.
In order to satisfy this burden of proof, the taxpayer should be prepared to show that:
- A bona fide claim for personal injury was asserted as part of the litigation claim
- The settlement agreement between the parties recognized that the personal injury claim was resolved as part of the settlement
- The agreement allocated a reasonable portion of the settlement amount as consideration for the release of the claim.
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