Do I Have to Pay Taxes on Verdicts or Settlements?

In a couple of recent lawsuits, plaintiffs sued Meta (the parent company of Facebook) claiming Facebook caused social media addiction. These plaintiffs won large verdicts.  These verdicts are not without controversy and will certainly be appealed, but nevertheless others may attempt to initiate lawsuits and may obtain large verdicts and settlements from social media companies such as Facebook, TikTok, and Instagram.  The question remains: If I successfully sue Facebook, TikTok, or some other social media company for causing addiction – do I have to pay taxes on verdicts or settlements? So, what are the federal tax implications for people who receive verdicts or settlements for suing social media companies for causing addiction or other psychological harm.

As a general disclaimer, this blog post is not about whether the verdicts were fair or correct.  I am a tax attorney and will defer to personal injury attorneys and mental health professionals as to the merits of these cases.   As I stated above, these verdicts will almost certainly go to the appellate courts, and I again defer to my colleagues who practice personal injury law as to how these cases should be ultimately resolved.  In addition, Federal and State legislation may be enacted to facilitate or prevent future lawsuits against social media companies, but that is a conversation for others.     

Under the internal revenue code, almost everything is taxable income.  There are some exceptions to this general rule.  One such exception is payouts for lawsuits involving physical injuries are not taxable.  However, judgments and settlements for psychological injuries are taxable.  In other words, someone who receives a judgment or settlement from a physical injury such as a broken leg does not have to pay income taxes on the judgment or settlement.  In contrast, someone who receives a judgment or settlement for a psychological injury such as emotional distress does have to pay income taxes on the judgment or settlement.  For those who receive judgments or settlements for psychological injuries, even if they suffer physical symptoms such as a loss of sleep or headaches from anxiety, federal income tax will be required.   

The social media addictions claimed in these lawsuits are most likely going to be considered psychological injuries for tax purposes (even if these people suffered physical symptoms such as losing sleep).  The individuals that collect lawsuit judgments or lawsuit settlements in these suits will most likely have to pay income tax on the money they receive.  Perhaps one may wish to advance a novel and untested legal theory that social media companies are somehow attacking the nervous system of their users creating a physical injury to the users’ nervous system, and therefore, the damage awards would not be taxable.  Again, this theory has not been approved by any court, and it would be an extremely aggressive and inadvisable position to take on a tax return.

There may be potential tax deductions for people who receive a lawsuit judgment or lawsuit settlement in a social media addiction suit.  These people may be able to claim at least part of the treatments they are receiving as a medical expense deduction.  Casualty loss deductions may be available to people who may have been defrauded or suffered some other loss as a result of their social media use.  Unfortunately for many litigants, legal fees may not be deducted from taxable income in many cases. 

It is always recommended to seek professional tax guidance in advance of receiving verdict or settlement proceeds to fully understand and prepare for any tax related requirements.

RJS LAW is a full-service Tax Law Firm assisting clients with various federal and state related tax issues Please feel free to contact us for a free consultation at 619-595-1655 or on the internet at RJS LAW if you have any questions regarding any tax matter.