Depending on the jurisdiction, income taxes may need to be incorporated into an analysis of economic damages. The application of income taxes to an analysis may be relevant to one or more factors in an economic damage analysis, again, depending on the jurisdiction rules.
The primary and most obvious application of income taxes is to the earnings the individual would have received had they not been injured or died, and in personal injury cases the earnings they are projected to receive now that the injury occurred. By adjusting the projected earnings for the income taxes owed on those earnings, the resulting effect is a reduction to economic damages.
Income taxes may also need to be applied to the discount rate being used to adjust the economic damages to present value. Discount rates in analyses of economic damages account for the interest that will be earned from the potential award after it is received and invested. If income taxes should be applied to the interest earned, the result would be a reduction in interest received on the damage award. The resulting effect of applying taxes to the discount rate is an increase in economic damages.
It is sometimes appropriate to apply income taxes to the award itself. This may be the case when the award is taxable. If income taxes are required to be paid on the award, the individual would be left with less money to invest towards their losses. By applying income taxes to the potential award, the resulting effect is an increase in economic damages.
Jurisdiction rules should be reviewed before applying any income taxes to the analysis.