Taxes on Job Settlements

Emotional distress or discrimination damages: If part of the settlement compensates you for emotional distress, it is taxable unless directly related to a physical injury or illness.
Back pay or severance pay: These are considered taxable income and will be reported on a W-2 or 1099.
Medical expense reimbursement: If your settlement includes compensation for medical expenses that were not deducted on prior tax returns, this portion may be non-taxable.

The IRS generally does not allow legal fees to be deducted for personal lawsuits, except in certain circumstances, such as:

Cases involving unlawful discrimination claims, including workplace discrimination. Under the Tax Cuts and Jobs Act, you may be able to deduct legal fees above-the-line for these claims, meaning they reduce your taxable income directly.

Ask your lawyer for an itemized settlement agreement. It should specify:

Amounts allocated to various damages (emotional distress, wages, medical expenses, etc.).
Legal fees, to confirm their deductibility.

You can deduct unreimbursed medical expenses if they exceed 7.5% of your adjusted gross income (AGI) on your federal tax return. These include:
- Health insurance premiums.
- Out-of-pocket medical costs.
- Travel expenses for medical care (e.g., trips to Boston or Connecticut).

Both states generally follow federal tax treatment, but they may have additional deductions or credits for:
- Low-income individuals.
- Residents with high medical costs.

Consult a local tax professional to identify state-specific benefits.

If you are approved for Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI):
- SSI is non-taxable.
- SSDI can be partially taxable if you have other income sources exceeding a threshold.

Public benefits like EBT (food stamps) are not taxable and don’t need to be reported as income.
Some states offer property tax credits, utility assistance, or other deductions for low-income individuals or those on public assistance. Check state-specific programs.

Seek a CPA or tax attorney: Given the complexity of your settlement and medical situation, professional help is advisable. Look for someone experienced in employment settlements and medical deductions.
File IRS Form 8275: This can help explain complex deductions like legal fees, reducing your audit risk.
Apply for local assistance: Explore nonprofit programs in NYC and CT that may offer housing, tax preparation, or financial support.