What comes out of a recovery
The number in a settlement agreement is not the number that reaches you. The legal fee and case expenses come out under the written retainer. Medicare and Medicaid are repaid for treatment they covered. New York City deducts child support arrears, public assistance and parking judgments before it pays. Part of what is left may be taxable, and the rules turn on whether the injury was physical. This page goes through each deduction, the fee rules that can help or hurt, and the interest that runs on a judgment. It is not tax advice.
Five things can stand between a gross recovery and the person it belongs to: the legal fee, the case expenses, liens for medical care someone else paid for, offsets for debts owed to the government that is paying, and tax. Two things can add to it: a court award of attorney's fees against the defendants, and interest. A client should see all of them on paper, in a closing statement, before signing a release. This page explains each one so that the statement makes sense when it arrives.
This page is not tax advice. The tax rules below are the federal statutes that most often matter in a civil rights case, stated generally. How they apply to a particular settlement depends on how the settlement is written and on your own return, and a tax professional should look at both.
The legal fee and the expenses
We take police abuse cases on a contingency fee. Our legal fee is a percentage of what is recovered, and if nothing is recovered there is no legal fee. The percentage is confirmed in a written retainer before we begin. Court filing fees and case expenses, such as records, transcripts and depositions, are separate from the legal fee, and the retainer says who advances them and how they are repaid from a recovery. We do not publish the percentage on this site or describe the fee with a slogan. The retainer is the fee agreement. Read it before you sign it, and ask about any line you do not follow.
Florida adds a statutory limit. On a state-law claim under Florida's sovereign immunity waiver, attorney's fees are limited to 25 percent (Fla. Stat. § 768.28(8)). That limit is on the lawyer's fee for the state-law claim. It sits beside the statutory caps on what the government pays on that claim, which the Florida recovery page explains.
Fees the court awards against the defendants
In a Section 1983 action the court "may allow the prevailing party, other than the United States, a reasonable attorney's fee as part of the costs" (42 U.S.C. § 1988(b)). The award is against the defendants and is separate from the damages. It does not have to be proportionate to them: in City of Riverside v. Rivera, 477 U.S. 561 (1986), a plurality upheld a fee award of $245,456.25 where the damages were $33,350. Both figures are court awards in another person's case, from a published decision.
The rule has a floor. In Farrar v. Hobby, 506 U.S. 103 (1992), the Court held that a plaintiff who wins nominal damages is a prevailing party, but that where substantial damages were sought and only nominal damages won, "the only reasonable fee is usually no fee at all." The retainer explains how a court-awarded fee is treated between lawyer and client. The New York City civil rights law, the New Jersey Civil Rights Act and New York's recording statute have fee provisions of their own; the damages and fees page lists them.
Rule 68: the offer that shifts the risk
Defendants can serve a formal offer of judgment under Federal Rule of Civil Procedure 68. In Marek v. Chesny, 473 U.S. 1 (1985), the Supreme Court held that where the underlying statute defines costs to include attorney's fees, as § 1988 does, a plaintiff who rejects a Rule 68 offer and then recovers less loses the § 1988 fees incurred after the offer. A Rule 68 offer is not a routine letter. It is a decision with a cost attached, and it is yours to make with the numbers in front of you.
Medicare and Medicaid
If a public program paid for treatment of the injury, it has a claim on the recovery. A Medicaid recipient assigns to the State the right to third-party payment for medical care (42 U.S.C. § 1396k(a)). Medicare's payments are conditional: where someone else turns out to be responsible, Medicare's conditional payments must be repaid from the settlement, judgment or award (42 U.S.C. § 1395y(b)(2); CMS). Neither can be ignored, and both take time to resolve. We ask about coverage at the start so the lien is known before anyone discusses a number.
New York City's offsets
The City of New York does not simply pay a settlement. It first checks what the claimant owes. The Comptroller offsets settlements for public assistance and Medicaid reimbursement, child support arrears and parking judgments. The Comptroller's Annual Claims Report for fiscal 2023 gives the scale: $7.5 million collected in the year, made up of $4.6 million in Medicare and Medicaid liens, $1.4 million in child support and $942,897 in parking judgments. Those are Comptroller collections from other people's settlements in fiscal 2023, reported as public statistics. They are not fees and they are not ours. If you owe child support or have unpaid parking judgments, tell your lawyer early; it changes the arithmetic, not the case.
Tax
Again: this is not tax advice. Three federal rules come up most.
Physical injury. Damages, other than punitive damages, received on account of personal physical injuries or physical sickness are excluded from gross income (26 U.S.C. § 104(a)(2)). A recovery for a broken wrist is on one side of that line.
Emotional distress and punitive damages. The same section says emotional distress is not treated as a physical injury or physical sickness, except up to the amount paid for medical care attributable to it. Punitive damages are taxable. A false arrest with no physical injury, where the harm is lost liberty and distress, raises exactly this question, which is one reason the wording of a settlement agreement matters.
The lawyer's share. Congress wrote a rule for civil rights plaintiffs. Attorney's fees and court costs paid in connection with an action involving a claim of "unlawful discrimination" are deductible above the line, and the statute defines that term to include claims under 42 U.S.C. §§ 1981, 1983 and 1985. The deduction is limited to the amount includible in income that year (26 U.S.C. §§ 62(a)(20), 62(e)).
What we do, and what we do not
We negotiate the settlement and the language that describes what it pays for. We do not give tax advice and we do not prepare returns. Before a settlement of any size is signed, have a tax professional read the draft.
Interest
In federal court, interest runs on a money judgment from the date the judgment is entered, at the weekly average one-year Treasury yield, compounded annually (28 U.S.C. § 1961). It matters when a defendant appeals, because the judgment earns interest while the appeal is pending. Whether prejudgment interest is available on a Section 1983 award is a question we have not verified to this site's standard, so it is not answered here.
State law has its own rules. In New York, interest on a judgment against a municipal corporation "shall not exceed nine per centum per annum," and the rate is 6 percent on a wrongful death judgment (N.Y. Gen. Mun. Law § 3-a). In Florida no prejudgment interest may be awarded against the government on a state-law claim (Fla. Stat. § 768.28(5)(a)).
The order of things
| Item | Direction | Set by |
|---|---|---|
| Court-awarded attorney's fees | Added, paid by the defendants | 42 U.S.C. § 1988(b); Riverside; Farrar; Marek |
| Postjudgment interest | Added | 28 U.S.C. § 1961; N.Y. Gen. Mun. Law § 3-a |
| Legal fee | Out | The written retainer; in Florida, the 25 percent statutory limit on state-law claims (Fla. Stat. § 768.28(8)) |
| Case expenses | Out | The written retainer |
| Medicare and Medicaid | Out | 42 U.S.C. §§ 1395y(b)(2), 1396k(a) |
| City offsets (New York City) | Out, before payment | NYC Comptroller practice, Annual Claims Report, fiscal 2023 |
| Federal income tax | Depends on the kind of damages | 26 U.S.C. §§ 104(a)(2), 62(a)(20) |
None of this changes whether a claim is worth bringing. It changes what a settlement figure means, and it is why two people who settle for the same amount can take home different sums. If a criminal charge from the same incident is pending, talk to your defense lawyer before describing the arrest to anyone; the criminal case and civil case page explains why.
Who pays
Indemnification in four states, punitive damages against individuals, and why the City pays.
Who pays →Settlement and trial
How settlement works, who decides, what a jury decides, and what happens after a verdict.
Settlement and trial →Recovery, all four states
The federal claim against the state claims, and the comparison table for the four states.
Recovery →Common questions
Is a police misconduct settlement taxable?
It depends on what the money is for, and this is not tax advice. Under 26 U.S.C. 104(a)(2), damages other than punitive damages received on account of personal physical injuries or physical sickness are excluded from income. Emotional distress is not treated as a physical injury, except up to the amount paid for medical care for it. Punitive damages are taxable. A tax professional should review the settlement before it is signed.
Do I pay tax on the part that goes to my lawyer?
The tax code has a specific rule for civil rights cases. Under 26 U.S.C. 62(a)(20) and 62(e), attorney's fees and costs in an action involving unlawful discrimination, a term that includes claims under 42 U.S.C. 1981, 1983 and 1985, may be deducted above the line, limited to the amount includible in income that year. How it applies to a particular settlement is a question for a tax professional. This is not tax advice.
How does your fee work?
On a contingency fee. Our legal fee is a percentage of what is recovered, confirmed in a written retainer before we begin, and if nothing is recovered there is no legal fee. Court filing fees and case expenses are separate from the legal fee, and the retainer says who advances them and how they are repaid. We do not publish percentages on this site; they are in the retainer.
What is a Rule 68 offer?
A formal offer of judgment by the defendants. Under Marek v. Chesny, where the fee statute defines costs to include attorney's fees, as 42 U.S.C. 1988 does, a plaintiff who rejects a Rule 68 offer and then recovers less at trial loses the fees incurred after the offer. It turns a settlement offer into a decision with a cost attached.
Tell us what happened.
One conversation with an attorney, in your language. We tell you which claims the facts support, which deadline runs first for the agency involved, what evidence to preserve this week, and whether a pending criminal case changes the timing. If it is not a case we can take, we say so and tell you where to go.
(718) 484-7510If a criminal charge is still open, talk to your defense lawyer before you describe the arrest to anyone, including us. English, Russian and Spanish in-house; an interpreter for any other language. Contingency fee, confirmed in writing before we begin.