Say you got hit by a drunk driver, and when you sued him, you won the case for 100 grand. Does the government get any of that?
I forgot to add, if they do, is it before or after the lawyer’s cut?
IANAL, but my understanding is that the gov’t’s position on this is that you are getting compensation for a loss and that is not income. Certainly, when I collected $400 from an insurance company after the '97 ice storm to cover food lost in the freezer, there was no thought of declaring it.
That is my experience as well, from an auto accident personal injury settlement.
What if you are awarded punitive damages as well? These are specifically not for compensation for a loss.
The answer to this question is rather complex, and depends on the nature of the suit and the settlement. Here is an IRS Publication that goes into some detail on it.
Generally, personal injury awards and settlements are not taxable, but contract or loss of earnings awards or settlements are. Punitive awards are generally taxable. But you really need to talk to a lawyer or accountant to get a specific answer.