On Feb. 28, Kobe Bryant’s widow Vanessa Bryant reached a settlement with Los Angeles County to the tune of nearly $29 million regarding the unlawful leak of photos from the site of the helicopter crash that took the lives of the basketball star, the couple’s 13-year-old daughter Gianna Bryant and seven other people in January 2020.
While the dollar amount is staggering, what’s also shocking is just how much the IRS will make on the payout. According to Forbes, “the taxman gets a piece of most lawsuit recoveries.” In the case of the Bryant family settlement, which includes $13.5 million from the county as well as another $15 million awarded in a jury trial, up to 37% will go to the IRS and 13.3% will go to the state of California since it’s taxed as income, literally cutting the money award in half. Adding to that is what Vanessa Bryant would pay to her lawyers, which can be up to 40%, says Forbes.
Vanessa currently has a net worth of $600 million according to In Touch Weekly, and it’s not immediately clear what she plans to do with the settlement money or if it might be donated (much of the arguments in the case were centered around setting a precedent for protecting the privacy of victim families). But either way, the tax responsibility may seem grossly unfair considering the circumstances that led to the lawsuit.
Initially, Vanessa waged the suit to accuse L.A. County of negligence and “violating her constitutional right to privacy.” Per Forbes, the case originally asked for $75 million due to emotional distress after L.A. deputies and firefighters shared graphic photos from the crash scene amongst each other, though they were never made public.
However, even though Vanessa took the stand to declare that the situation “compounded her grief” and led to a series of panic attacks, “that is probably not enough for a tax exclusion” because “under the tax code, damages for personal physical injuries or physical sickness are tax free, but damages foremotional injuries are taxable.” The article added that she may try to argue that, because her civil rights were violated, she should be able to write off her lawyer fees at minimum.
According to the IRS’ Internal Revenue Code Section 61 regarding taxes on lawsuit settlements, “All income is taxable from whatever source derived, unless exempted by another section of the code,” and additionally, “the facts and circumstances surrounding each settlement payment must be considered to determine the purpose for which the money was received because not all amounts received from a settlement are exempt from taxes.”
In general, the IRS stipulates that awards and settlements are categorized into two distinct groups — physical and non-physical injuries — to determine whether the payments are taxable or non-taxable. And within those two groups, the money is assessed as one of three classifications: “Actual damages resulting from physical or non-physical injury; emotional distress damages arising from the actual physical or non-physical injury; and punitive damages.”
The agency further goes on to explain that money awarded for non-physical injuries (i.e. emotional distress, defamation and humiliation) are not subject to federal taxes, but may need to be included as part of gross income.
Smart Asset lists some ways to lower tax liability on a settlement where taxes apply, including spreading out payments over years in order to reduce the burden on any one return; trying to classify award settlements as capital gains (in relation to money awarded for damages to property); and renegotiating the terms of the settlement to allocate more towards physical injuries and less to emotional distress.
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