Can language in a settlement agreement have affect on taxes for a personal injury lawsuit?

Question

I am located and suing in California. My lawyers filed a personal injury lawsuit/claim and sent a CCP 998, which the defendant accpected for judgment in my favor. The defense has sent over a settlement agreement, which my lawyers told me is a "standard settlement agreement" for terms of payment. The defense does not accept liability, disputes/refutes, and alleges my claims. The contract states in order to prevent further costly litigation both parties agree to settle, etc. It's important to note there are no punitive damages involved, and this is for a significant amount of money.

I've consulted tax attorney's and cpa's who suggest I add code 104(a)(2) to the settlement agreement, but the defendant refuses to amend. If I don't sign this agreement, we will have to appear in court to receive judgment and it would take longer to receive my money. Just to clarify my lawyers said whether I sign this agreement or not, it will be recorded with the courts that I've won. Apparently, this settlement agreement is just so I "can get the money sooner".

What I am questioning is; if the language in the settlement agreement is relevant to the IRS, since my claims solely arise from personal/physical injury? I want to make sure there are no loopholes as to what language is needed in the agreement to be considered tax free. Could there be tax implications if I sign the agreement acknowledging the defendant does not accept liability, or disputes my claims?

Answer 1

What I am questioning is; if the language in the settlement agreement is relevant to the IRS, since my sole claims arise from personal/physical injury? I want to make sure there are no loopholes as to what language is needed in the agreement to be considered tax free. Could there be tax implications if I sign the agreement acknowledging the defendant does not accept liability, or disputes my claims?

Generally speaking, the existing of a settlement agreement not acknowledging liability will not affect the tax treatment of a settlement. That term is in there to prevent the defendant from being barred from litigating a claim against another plaintiff involving partially overlapping issues.

The main issues in a settlement in a PI case that a settlement agreement could impact are whether any of the settlement is expressly allocated to punitive damages (which your question states are not), or to interest (which is taxable even when the principal is not), or to damage to property as opposed to a person (e.g. damage to both a car and the person in the car).