Semaria Consulting

Certified Fraud Examiner, Forensic Accountant & Former IRS Agent

Call: 718-531-1105
DrFraud.com   |   IRSAudit.com
  • Home
  • About Us
    • About Ron Semaria
    • Awards & Citations
    • Volunteer Work
    • Contact Information
  • Services
  • Affiliations
  • Press Releases
  • News Articles
    • News Articles
    • Tax Q&A
    • News Article Index
  • Call: 718-531-1105
  • LinkedIn

Lawsuit Taxability – Get The Best Tax Results When Settling A Lawsuit

Lawsuit Taxability – Get The Best Tax Results When Settling A Lawsuit

Gavel - Lawsuit TaxabilityUnder current tax rules, its possible for lawsuit winners to owe nearly as much tax as the statement amounts they receive. Strategy: Before you accept any court-awarded monetary damages, check whether you can draft the settlement in a way that minimizes taxes.

Key Point: Settlements shouldn’t be drafted so the award to the prevailing party is described as a lump sum. Significant portions of an award may not be taxable but the opportunity to save on taxes is often lost when the settlement is an all-inclusive amount.

It’s important to determine the tax consequences of a settlement before it is signed. Once your name is on the dotted line, you’re stuck.

Here are some tips that can save thousands of tax dollars:

  • Court-awarded reimbursements for medical expenses and personal injuries aren’t taxable. In contrast, punitive damages are taxable as ordinary income. Damage awards for nonphysical injuries, such as age discrimination or injury to your reputation, are also taxable.
  • If, possible settlements should be drafted to describe part of the monetary award as compensation for medical expenses or personal injury so that a portion can escape taxation.
  • If the same settlement is drafted as a lump sum, including punitive damages and interest, the entire award is likely to be taxed. The difference in taxes could be huge.
  • You can deduct attorney fees in a court settlement as miscellaneous itemized deductions on Schedule A. These deductions are limited to the amount exceeding 2 percent of your adjusted gross income. However, miscellaneous deductions are phased out for high-income taxpayers and deductions for attorney’s fees aren’t allowed when calculating the alternative minimum tax.
  • It’s customary for a settlement to be reported to the recipient with a 1099-MISC form sent for the entire amount.

Better approach: Request that the award be split, with one payment going to you and a separate payment going to the attorney. Make sure your contingent fee contract with your attorney reads the same way.

If you have any questions or require further info please call 718-531-1105 or send an email.
This web site and these articles are not tax or legal advice and are not intended as tax or legal advice. They are intended to provide only general, non-specific legal information and are not intended to cover all the issues related to the topic discussed. The specific facts that apply to your matter may make the outcome different than would be anticipated by you. This web site and these articles are based on United States law. You should consult with an accountant or lawyer familiar with the issues. This web site and the articles contained on this web site are not solicitations.

Filed Under: News Articles Tagged With: income, lawsuit, lawsuit taxability, personal income

You may also be interested in

  • Cancellation of Credit Card Debt Is Taxable As Ordinary Income

    Cancellation of Credit Card Debt Is Taxable As Ordinary Income

  • 7 Most Dangerous Errors In Employee Handbooks

    7 Most Dangerous Errors In Employee Handbooks

  • Lawsuit Settlements

    Lawsuit Settlements

Search

Recent News Articles

  • 9/11 is a special day
  • IRS Accidentally Exposed Tens of Thousands of Social Security Numbers
  • IRS Tax Audits – When It Pays To Ignore An IRS Audit Notice
  • The Disappearing Check 21 Law – Check Clearing For The 21st Century
  • IRS Tax Audits – Know Your Rights Before An Audit Begins
Index Of All News Articles

More Information

Privacy Policy
Links
RSS Feed
Sitemap
Disclaimer

Contact Info:

Ronald Semaria
Semaria Consulting
1408 East 66th St
Brooklyn, NY 11234
Email: info@semaria.com
LinkedIn

Phone Numbers:

Phone: 718-531-1105
Toll-Free: 866-531-1105
Toll-Free: 888-IRSAUDIT
Toll-Free: 888-RONTAXES
Fax: 718-444-7152

Websites:

www.Semaria.com
www.DrFraud.com
www.IRSAudit.com
Copyright © Semaria Consulting 1970-2021