Fired employee has to pay income tax on his settlement

A fired employee who received a $65,000 settlement has to pay income tax on this amount, according to a decision from the U.S. Tax Court. The employee was fired after working for 30 years at the “Story Land” amusement park in New Hampshire. He claimed he was wrongfully terminated and that Story Land officials subsequently damaged his reputation. The $65,000 was agreed to during a mediation session.

In general, people who receive a jury award don’t have to pay income tax on it if it was for physical injury or physical sickness, or was intended to compensate them for psychological treatment for emotional problems. The employee in this case claimed he suffered physical problems as a result of the firing, including depression, a sleep disorder, and elevated blood sugar levels, and that he saw a psychologist as a result.

But the court said that wasn’t good enough. It said the settlement in this case was for wrongful firing and defamation. While the employee might have suffered emotional distress, the settlement was intended as being in place of wages and wasn’t designed primarily to compensate him for a physical injury or a psychologist’s bills. In the end, the employee had to pay more than $13,000 in back taxes, as well as a $2,650 penalty to the IRS.