Are Lawsuit Settlements Taxable in Missouri?

The taxability of legal settlement funds in Missouri is a complex issue with significant implications for individuals who have received or are expecting to receive such payments. While federal law provides the primary framework for determining the tax treatment of settlements, state law also plays a crucial role in shaping the outcome.

Under the Internal Revenue Code (IRC), Section 104(a)(2) generally excludes from gross income damages received on account of personal physical injury or sickness. This means that if the settlement proceeds are primarily intended to compensate for physical injuries or illness, they are typically not taxable at the federal level. However, there are exceptions to this rule, such as punitive damages, which are generally taxable.

Missouri law generally aligns with federal law regarding the taxability of personal injury settlements. Compensatory damages, which are intended to reimburse the plaintiff for their losses, are typically not taxable under Missouri law. However, punitive damages are considered taxable income.

The taxability of a legal settlement can vary depending on the specific circumstances of the case and the nature of the damages awarded. For example, settlements received for emotional distress damages may be taxable if they are not directly related to a physical injury or sickness. Additionally, the tax treatment of property damage settlements, loss of earnings settlements, and attorney's fees can also vary.

It is important to note that the taxability of legal settlement funds can be a complex issue, and individuals who have received or are expecting to receive such payments should consult with a tax professional to ensure that they are complying with all applicable laws and regulations.