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Are Punitive Damages Taxable?

"Punitive Damages" printed on metal bar

Imagine the court has ruled in your favor, the plaintiff. The court also determines that punitive damages should be awarded against the defendant. Several thoughts run through your mind. What even are punitive damages? How would the fees be calculated? Are punitive damages taxed?

When Can Punitive Damages be Awarded?

In order to receive punitive damages, there are three legal steps that must be met.

  1. The court must rule for the plaintiff.
  2. The plaintiff must ask the court for punitive damages. If the judge rules that punitive damages should be awarded, the jury must then decide on the amount.
  3. The jury determines the exact amount based on circumstances and factors.

What are Punitive Damages in California?

First, it is important to understand the difference between punitive and compensatory damages in order to determine how the money amounts will be awarded. Punitive damages are most common in personal injury lawsuits. Personal injury lawsuits can range from car accidents, to medical malpractice. To better determine your type of lawsuit, contact our experienced personal injury attorneys. 

Compensatory damages are those that are awarded to compensate plaintiff for specific monetary costs after an injury. There are three types of compensatory damages, which include economic, non-economic, and punitive damages. Compensatory damages almost always are calculated with certainty and have a specific amount of money damages that can be proven. Common examples of compensatory damages include:

  • Medical bills
  • Physical therapy
  • Cost for medicine and prescription drugs
  • Lost wages
  • Medical equipment
  • Home care
  • Increased living expenses
  • Loss of opportunity
  • Loss of enjoyment of life
  • Physical pain and suffering

Punitive damages are those that are meant to make an example out of defendant. Punitive damages are not mandatory damages that must be awarded in every case. Punitive damages are awarded and determined on a case-by-case basis. Under California civil code section 3294 (a), in order to determine the amount of compensatory damages, the jury must consider

  1.  the reprehensibility of defendant’s conduct
  2.  the relationship between the amount of punitive damages and the harm that plaintiff suffered
  3.  the amount that will punish defendant and discourage the defendant and other potential defendants from engaging in this type of conduct
  4. other factors that the jury may consider are the defendant’s ability to pay the punitive damages

In order for punitive damages to be awarded, there must be “malice”, “fraud”, or “oppression” seen by the defendant’s actions. In order to better determine what these words mean; the California civil code has provided some definition and factors the jury may consider when determining if there has been behavior by defendant that should be punished with punitive damages. The plaintiff must prove any of the three factors below in order to receive punitive damages. The plaintiff must prove this by “clear and convincing evidence.”

  • Malice: Malice refers to the defendant’s thought process and actions when engaging in the behavior. For example, when defendant engages in some type of behavior that involves reckless and conscious disregard for the life of others, malice will most likely be found.
  • Fraud: Fraud involves some type of misrepresentation regarding a false statement on behalf of the defendant in order to make plaintiff rely upon the defendant’s statements. The plaintiff doesn’t fact rely upon the defendant’s statements, and the plaintiff has sustained injuries.
  • Oppression: Oppression involves some type of unjust hardship toward a specific plaintiff.

California Punitive Damages Cap

Under California civil code section 3294 (a), plaintiffs may recover for punitive damages. It specifically states, “In an action for the breach of an obligation not arising from contract, where it is proven by clear and convincing evidence that the defendant has been guilty of oppression, fraud, or malice, the plaintiff, in addition to the actual damages, may recover damages for the sake of example and by way of punishing the defendant.”  As long as the amount is not excessive, California does not have a specific number of punitive damages that must be awarded. The Supreme Court has ruled in the past that 9 times the compensatory damages amount is a good number for the jury to base the punitive damages amount on.

Nevada Punitive Damages Cap

In contrast with California, Nevada does have a cap on punitive damages. Nevada states the limit a plaintiff could collect for punitive damages are $300,000 when plaintiff receives less than $100,000. If plaintiff receives an amount of more than $100,000 in compensatory damages, then the plaintiff could receive three times the amount in punitive damages. Nevada law also states that in certain cases, there is no cap on the amount of punitive damages. These cases include:

  • Defective product cases
  • Defamation
  • When defendant is under the influence of alcohol, drives, and causes an accident that injures the plaintiff
  • When the defendant has engaged in discrimination regarding housing practices
  • When insurance companies engage in bad faith
  • When defendant engages in disposing toxic materials or hazardous waste

Examples where punitive damages are most likely awarded include:

  • Personal injury such as car accidents
  • Wrongful termination claims by an employee
  • Fraudulent misrepresentations made between two partners
  • Instances of assault and abuse

Are Punitive Damages Taxed?

Under the IRS settlement liability rules under Publication 4345, punitive damages are considered taxable, and must be reported under other income on line 21 on form 1040. Punitive damages are taxed despite the type of claim or case. For example, punitive damages are taxed if it’s in a settlement for personal injuries or for physical sickness.

However, wrongful death cases that have awarded punitive damages do not have to be taxed. This would fall under IRC section 104. For more information to determine if your punitive damages settlement is in fact taxable, contact our punitive damages attorneys today.

Are compensatory damages taxable?

Not all compensatory damages are taxable. It depends on what the award amount is meant to replace. For example, compensatory damages awarded for physical injuries are not considered taxable and will not be considered an income. Further, when there is emotional distress suffered by the plaintiff’s injuries, this is also considered non-taxable compensatory damages. The jury must determine whether the physical injury caused the suffering or whether the physical symptom was caused by the emotional stress. Usually, plaintiffs will put on an expert to determine what caused the injury. If the emotional distress is completely separate from the physical injury, then it will not be considered taxable.

If you have been involved in a personal injury lawsuit and the defendant’s behavior involves some type of oppression, fraud, or malice, you may be entitled to receive punitive damages. To better determine the success of your case, contact our experienced California personal injury attorneys today.

Our Los Angeles experienced personal injury attorneys are experienced in different types of punitive damages lawsuits. For more information, check out our Los Angeles car accident attorney page. If you or someone you know has been involved in a personal injury lawsuit, contact our experienced Los Angeles attorneys today for a free consultation to determine if punitive damages could be awarded.

We are always readily available for our clients with accessible offices in Los Angeles, Sacramento, Irvine, and Las Vegas. Heidari Law Group will be there to assist you.

***Disclaimer: This blog is created by Heidari Law Group for educational purposes. This article provides a general understanding of the law. It does not provide specific advice. By using this site and reading through this blog, there is no attorney-client relationship created between you and any member of Heidari Law. Further, due to the constant change of the law, some parts of the information above may no longer be good law.

Sam Heidari

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Sam Heidari

Sam Ryan Heidari

Sam Heidari is the founding principal of Heidari Law Group, a law firm specializing in personal injury, wrongful death, and employment law with offices in California and Nevada. Sam Heidari has been practicing law for over 11 years and handles a wide range of cases including car accidents, wrongful death, employment discrimination, and product liability. The Heidari Law Group legal firm is known for its comprehensive approach, handling cases from initial consultation through to final judgment. Sam Heidari is dedicated to community involvement and advocacy for civil liberties.

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