Exciting Tax News: How much of Devon's lawsuit settlement is taxable income?

Q1. Devon was involved in a vehicle accident. Devon sued Dianne, the other driver. Dianne was found to be 100% at fault. Devon received several payments as part of the lawsuit. How much of the settlement should Devon include in her taxable income?

a. $0

b. $30,000

c. $60,000

d. $130,000

The answer to your question:

Devon should include $30,000 in her taxable income.

Devon should include $30,000 in her taxable income because the other amounts she received are not considered taxable. In general, compensation received for personal injuries or physical harm is not subject to federal income tax.

Therefore, the $30,000 received for physical injuries sustained in the accident and the $40,000 for medical care are not taxable. The $60,000 received as punitive damages is also not taxable, as punitive damages in a personal injury lawsuit are exempt from income tax.

Additionally, the $30,000 received to replace Devon's car is not taxable either, as reimbursement for property damage is typically not considered taxable income.

It's crucial to understand the tax implications of personal injury settlements, as certain payments may or may not be taxable. Consulting with a tax professional or referring to IRS guidelines can help ensure compliance with tax regulations.