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Settlement tax planning

Settlement tax calculator: estimate your 2026 federal income tax.

Not all settlement money is taxed the same way. Physical injury proceeds are usually tax-free under IRC §104(a)(2). Employment settlements are fully taxable as ordinary income. Punitive damages, interest on delayed payments, and investment returns on settlement proceeds are taxable regardless of settlement type. This calculator estimates your 2026 federal income tax, the marginal rate applied to your settlement, and what you'll net after attorney fees and the tax impact.

Your settlement details

Why settlement type determines your tax

The tax treatment of settlement proceeds depends on what the settlement compensates — not the size of the payment, who the defendant is, or whether you take a lump sum or structured payments.

Physical injury
Wrongful death
Medical malpractice Generally tax-free IRC §104(a)(2) excludes compensatory damages for physical injury from gross income.1 Punitive damages and interest on delayed payments remain taxable.
Employment settlements Fully taxable Back pay, lost wages, and emotional distress damages are ordinary income. IRC §62(a)(20) allows an above-the-line deduction for attorney fees in discrimination and whistleblower cases.2
Workers' compensation Generally tax-free IRC §104(a)(1) excludes workers' comp payments from income.1 Exception: a lump-sum settlement may trigger the SSDI 80% offset calculation, effectively reducing Social Security benefits rather than creating a tax bill.
Investment returns are always taxable. The §104 exclusion covers the settlement itself — not what the money earns after you receive it. Interest, dividends, and capital gains on invested settlement proceeds are ordinary income (or capital gain income) in the year earned, regardless of settlement type.

The §62 attorney fee deduction for employment cases

IRC §62(a)(20) allows you to deduct attorney fees paid in employment discrimination or whistleblower cases above the line — reducing your adjusted gross income even if you don't itemize.2 This is significant. If you receive a $400,000 employment discrimination settlement and pay $160,000 (40%) in attorney fees, only $240,000 flows into your taxable income from the settlement. The gross settlement is still income; the deduction simply offsets it.

The §62(a)(20) deduction does not apply to all employment cases. The underlying claim must involve employment discrimination under a civil rights statute (Title VII, ADA, ADEA, and similar) or a whistleblower claim. Confirm with your attorney and CPA that the deduction applies to your specific case before relying on it.

Estimated quarterly tax payments

Settlement proceeds are not withheld. If your tax liability significantly exceeds what's already withheld from wages, you may owe an underpayment penalty under IRC §6654. Two safe harbors exist:3

2026 quarterly due dates: April 15, June 16, September 15, and January 15, 2027. If settlement funds arrive mid-year, an increased later-quarter payment can catch up. A CPA can calculate the exact amount needed to avoid penalties.

Connect with a settlement financial advisor

A fee-only settlement advisor can coordinate with your attorney and CPA on tax allocation, §62 deductions, quarterly estimated payments, and how to invest settlement proceeds tax-efficiently after funds arrive. Best fit: expected proceeds of $500K+ or a settlement that must support care, income, housing, or dependents.

Fee-only focus | Free match | No obligation

Also see: Is settlement money taxable? (guide by type) · Structured settlement vs lump sum calculator · How to invest settlement money

Sources

  1. IRC §104 — Compensation for injuries or sickness, LII / Cornell Law School. §104(a)(1) excludes workers' compensation from income; §104(a)(2) excludes compensatory damages for personal physical injuries. Punitive damages remain taxable regardless of settlement type. IRC §104 was not affected by the One Big Beautiful Bill Act (July 2025) or the Social Security Fairness Act (January 2025). Verified June 2026.
  2. IRC §62(a)(20), LII / Cornell Law School. Above-the-line deduction for attorney fees paid in employment discrimination and whistleblower cases; reduces AGI without requiring itemization. Applies to cases under Title VII, ADEA, ADA, and analogous civil rights statutes. Verified June 2026.
  3. IRS Publication 505 — Tax Withholding and Estimated Tax. Safe harbor rules: 100% of prior-year liability (110% if prior-year AGI exceeded $150,000), or 90% of current-year liability. 2026 quarterly due dates: April 15, June 16, September 15, January 15. Verified June 2026.
  4. IRS Rev. Proc. 2025-32. Official 2026 tax bracket thresholds and standard deduction amounts used in this calculator. Single: $16,100 standard deduction; 10% to $12,400; 12% to $49,840; 22% to $106,250; 24% to $202,850; 32% to $257,540; 35% to $640,600; 37% above $640,600. MFJ: $32,200 standard deduction; 37% above $768,600. HOH: $24,150 standard deduction. Published October 2025.
  5. IRS — Tax Implications of Settlements and Judgments. IRS guidance on which settlement types qualify for the §104 exclusion, including employment discrimination claims and personal injury. Accessed June 2026.

2026 federal brackets per IRS Rev. Proc. 2025-32. MFJ brackets use 2× single thresholds through the 32% band; 37% at $768,600 confirmed from IRS guidance. HOH brackets approximate per Rev. Proc. 2025-32 pattern; single filer thresholds apply from the 22% band upward. State income tax and NIIT not included. This calculator is an estimate only — coordinate all settlement tax determinations with your CPA and attorney before making irreversible decisions.