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Compensatory Damages are Not Taxable!

On August 22, 2006, D.C. circuit Court of Appeal ruled that compensatory damages awarded to an ex-employee against her former employer for emotional distress are not taxable. The Court reasoned that such payments are paid in “lieu of” loss of good mental health and not earnings and as such no taxes are applicable to them. Employees who are thinking about settling their claims must keep this ruling in mind when wording their settlement agreements.