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In 2018 and thereafter, if your personal injury compensation is taxable, there is no deduction for legal fees. Yes, that means you collect 65% (your attorney keeping 33%), but are taxed on 100%.
To qualify for tax-free treatment, compensation must be from physical Injuries. Emotional distress is not enough, and physical symptoms such as insomnia, headaches and stomachaches are normal byproducts of emotional distress, says the IRS. This means that sums you receive for emotional distress, punitive damages and interest would be taxable.