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Zaher Fallahi, CPA; Non-Taxable Income

posted Dec 11, 2016, 10:23 PM by Zaher Fallahi   [ updated Dec 12, 2016, 8:00 AM ]

A- Generally, the following are non-taxable income: 

 1- Child support payments.

2- Gifts.

3- Inheritances.

4- Welfare benefits.

5- Court awards or settlements received for personal injury or sickness are normally tax-free. However, 
    i) Punitive damages are generally taxable

   ii) Compensation for lost wages are usually taxable

  iii) Settlements/awards for emotional distress are usually taxable


Note: If your trial lawyer tells you that your settlements/awards are tax free, thank her or him for it, and ask to show you the following references regarding non-taxable amount:  


i) Particular tax code.

ii) Causes of action alleged in the complaint.

iii) Specific language used in the settlement agreement.

iv) Pertinent sections in the court decree.


This would avoid receiving a surprised and unpleasant taxable 1099 at the year-end. Every year, I assist tax clients who have won or settled a case, and were informed by their trial lawyers that their settlements/ awards were non-taxable. But, they receive a 1099 from the payors to the contrary.

B- On the other hand; income may be taxed in some situations, but not in others. 
1- Social Security benefits are usually tax-free, unless your income is above certain levels. Therefore, you pay tax on part of your benefits.     
2- Distribution from a traditional IRA is generally taxable. But money you take out of a Roth IRA is usually tax-free.

3- Some settlements/awards such as Emotional Distress and Punitive Damages may be partially taxable.

Remember, income such as wages, salaries, tips and bartering income are taxable. To learn more about taxable and nontaxable income, refer to the IRS Publication 525 from their website at


Zaher Fallahi, CPA, JD, advises taxpayers and their attorneys on tax implication of settlements/awards. Telephones:  (310) 719-1040 (Los Angeles), ( 714) 546-4272 (Orange County) or e-mail [email protected]