Facts About An Auto Dealer Filed An Erroneous Criminal Complaint Against The Taxpayer

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Facts An auto dealer filed an erroneous criminal complaint against the taxpayer, Marlene. As a result she was falsely imprisoned for approximately 8 hours. Although the criminal charges against Marlene were expunged, and she did not suffer any physical injury, she endured mental distress during the ordeal that required the intervention of a psychologist. Marlene paid $5,000.00 for the counseling services rendered by the psychologist. Marlene then proceeded to file a lawsuit against the auto dealer for malicious prosecution. In the end, a settlement of $100,000.00 was awarded to Marlene of which $30,000.00 was allocated to the attorney in adherence to the contract stipulation of 30% of any proceeds. The attorney issues a check of $70,000.00…show more content…
The psychologist visits must be itemized on Form 1040, Schedule A. The proceeds Marlene received from the outcome of the lawsuit will be included as part of her taxable gross income. As a general rule, the proceeds received from most personal injury claims are not taxable under federal or state law. It does not matter whether you settled the case before or after filing a lawsuit in court. Federal tax law excludes damages received as a result of personal physical injuries or physical sickness from a taxpayer’s gross income. This means typical personal injury damages that are meant to compensate the claimant for things like lost wages, medical bills, emotional distress, pain and suffering, and attorney fees are not taxable as long as they are related to a personal injury or a physical sickness. A physical sickness means a claim for an illness. Damages other than punitive damages that are received on account of personal physical injury or physical sickness are excluded from gross income, whether they are received as the result of a lawsuit or the settlement of a lawsuit, and as lump sums or as periodic payments. Code Sec. 104(a)(2). Damages means an amount received through prosecution of a lawsuit or through
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