New Jersey Taxes

• In New Jersey, some judgments are taxable and others are not. All punitive damages (regardless of whether the case involved personal injuries), compensatory damages concerning non-physical injuries, and post-judgment interest are taxable as ordinary income. All compensatory damages awarded for physical injuries and sickness and money received for out-of-pocket medical expenses are not taxable. Compensatory damages are those awarded to compensate a victim for her losses and can be awarded in any type of case, including personal injury and breach of contract cases. Punitive damages are those awarded to punish a defendant for misconduct as opposed to compensating a victim for losses.
  
  

Federal Taxes

• Generally speaking, litigation proceeds are subject to federal tax in the same circumstances as they were subject to New Jersey State tax. Thus, post-judgment interest, compensation for lost wages or lost profits, punitive damages, and an award of attorney fees and costs are subject to federal tax as ordinary income. Similarly, compensatory damages for physical injury or sickness and out-of-pocket costs are not taxable.
  
  

Settlements

• The same rules that apply to monetary judgments following trial apply to money received by way of an out-of-court settlement. With settlements, however, it is important to make clear what portion of the settlement is to compensate for physical injuries and which portion is not. If the settlement agreement is unclear, the tax payer will have a more difficult time, if audited, in demonstrating to the authorties that additional tax is not owed.
  
  

Exception

• Regardless of the type or amount awarded, if the tax payer's total gross income, including the litigation award/settlement, is less than $10,000, there is no tax due by the tax payer.