If you are receiving money from the PG&E fire settlement the award may be taxable to you.
In general, all income is considered taxable unless Congress says it is not (IRC 61). So, when we look at your PG&E settlement offer, we start with the presumption that all of it is taxable and then we walk through the Internal Revenue Code to try and find ways to make it not taxable.
What the Award is For
First, you have to determine what your award is for. The PG&E Fire Trust has been providing worksheets that detail all the part of your settlement award (e.g. Emotional Distress-Nuisance, Emotional Distress-Zone of Danger, Personal Injury, Real Property, Interest, etc). If you receive a lump sum amount with no details then you can ask your attorney for the detailed worksheets. If there are no worksheets available, you have to go back to the original complaint and allocate the award against the complaint.
Is It Income
Next you have to determine whether each part is includable or excludable from income. Some common settlement elements are:
- Physical Injury (IRC 104) – payments for physical injury or sickness are excludable from income, but the injury must be physical meaning there was bodily harm.
- Emotional Distress (IRC 104) – payments for emotional distress are includable in income unless the emotional distress is a result of the physical injury. If you have a physical injury as a result of emotional distress that would still be included in income — the bodily harm must happen first to exclude it.
- Property Settlements – payments for your real property/contents could be excludable as a disaster relief payment if you rebuild (IRC 139), or you may be able to exclude some of the gain by taking a personal residence exclusion (IRC 121), or you could defer the gain by meeting the requirements of an involuntary conversion (IRC 1033). (Note: Involuntary conversions have specific rules and timelines and the timelines could be tight, especially for Tubbs fire victims).
- Interest – interest is taxable
Deducting Attorney Fees
Most of the PG&E fire lawsuits are contingent fee lawsuits which means that the attorney fees cannot be excluded from the gross award (Comm v Banks). So, if you receive $100,000 and give 25% to your attorney, you are still taxed on the full $100,000. Further, the Tax Cuts and Jobs Act eliminated the tax deduction (IRC 67) for attorney fees through 2025, so there is no deduction available for the attorney fees on your Federal Income Tax Return (attorney fees are still deductible on the California Return).
Some exceptions are:
- If part of your award is determined to be non-taxable (e.g. under IRC 139) then a pro rata share of the attorney fees would also be non-deductible on the CA return.
- If part of your award receives capital gain treatment then a portion of the attorney fees can be added to the basis of the property and thus will be deductible (United States v. Hilton Hotels Corp).
This can be a very complex tax situation thus we recommend you hire a competent professional to help you.