Tax Treatment of Damages Received in Personal Injury Lawsuit

[Your Name]
[Tax Consultant]
[Address Line 1]
[Address Line 2]
[City, State, Zip Code]
[Date]

Teddy and Abby Chow
654 Hops Street
Golden, CO 78501

Dear Teddy and Abby,

I hope this letter finds you well. I have conducted research on the tax treatment of the amounts received by Teddy Chow in connection with the personal injury lawsuit, and I am writing to provide you with an overview of the tax implications of the settlement.

1. Initial Damage Award: In 2019, a jury awarded Teddy $1.62 million in damages for the personal injuries sustained in the auto accident. This amount is generally considered tax-exempt when received as compensation for physical injuries or physical sickness. Therefore, the $1.62 million initial award should not be subject to federal income tax.

2. Delay Damages: The additional $1.08 million in delay damages that were added to the initial award also constitute compensation for the personal injuries suffered by Teddy. As such, these delay damages are treated similarly to the initial award and should be considered tax-exempt.

3. Settlement Amount: Following the appeal and subsequent settlement, Teddy received $2.55 million. The settlement amount of $2.55 million includes both the initial damage award and the delay damages. As these amounts are related to personal injury claims, they should maintain their tax-exempt status.

4. Attorney Fees: It is important to note that attorney fees incurred in connection with the lawsuit are generally not tax-deductible for personal injury settlements that are tax-exempt. In this case, the $850,000 in attorney fees that were subtracted from the settlement amount do not impact the tax treatment of the damages received by Teddy.

5. Net Amount Received: After deducting the attorney fees, Teddy received $1.7 million in 2019. This net amount represents the tax-exempt portion of the settlement related to personal injury damages and should not be included in Teddy’s taxable income.

In conclusion, based on the information provided and the tax treatment of personal injury settlements, it is likely that the amounts received by Teddy Chow from the lawsuit are not taxable for federal income tax purposes. It is advisable to consult with a tax professional for a comprehensive review of your individual circumstances and any specific state tax implications that may apply.

If you have any further questions or need additional clarification, please do not hesitate to reach out. Thank you for entrusting me with this matter.

Warm regards,

[Your Name]
Tax Consultant