I Love Taxes
December 11, 2009 12:23 PM Subscribe
Tax question: How do I report money on a lawsuit settlement? Which tax form to use?
I received a settlement of about 25,000 dollars this year. This was from a school I used to attend. Most of it was recouping tuition and living expenses. Some of it was for lawyers fees, and some for emotional damages. There were not a lot of punitive damages or anything. How do I report this? How much of this is taxable? Which form should I use?
I only had some small freelance income other than that this year, so I'm filling out a 1099. I would rather not pay to see an accountant, but will if necessary. Can I use turbo tax or something to get this figured out?
I received a settlement of about 25,000 dollars this year. This was from a school I used to attend. Most of it was recouping tuition and living expenses. Some of it was for lawyers fees, and some for emotional damages. There were not a lot of punitive damages or anything. How do I report this? How much of this is taxable? Which form should I use?
I only had some small freelance income other than that this year, so I'm filling out a 1099. I would rather not pay to see an accountant, but will if necessary. Can I use turbo tax or something to get this figured out?
Got to go to an accountant. I'm a lawyer, and I would definitely go to an accountant. It's not for amateurs.
posted by yarly at 12:41 PM on December 11, 2009
posted by yarly at 12:41 PM on December 11, 2009
Questions like these are one part of my job, but I am not your settlement planner/wealth manager/tax expert. I am not giving tax advice, I am not qualified to give you tax advice, I don't want to give you tax advice. The only advice I am giving you, is to go get qualified tax advice.
Typically any kind of damages other than punitive damages received for physical and personal injuries or sickness are tax free under I.R.C. 104. That is, even future lost income (which one would have earned and on which paid taxes) is said to be tax free when paid in settlement of a claim for a physical injury. In a general sense, damages which do not arise from physical injury or sickness are included in gross income and thus taxable. Determining the difference between "physical injury" and "emotional damages" is not always as straightforward as it might appear. A decision in the Murphy case suggested for a short time that tax on 'emotional' damages' might be unconstitutional, but that was overturned.
I say this to point out that there is not a straightforward, layman-accessible answer, and that you very much ought to consult a tax professional. Much depends on the way your lawsuit was filed, and the exact causes of action raised. Much also may depend on the terms of the settlement agreement you reached with the school. I would suggest you contact the lawyer that handled the settlement, and obtain from them a referral to a tax professional who is experienced with handling awards and settlements arising from lawsuits.
posted by bunnycup at 12:58 PM on December 11, 2009 [2 favorites]
Typically any kind of damages other than punitive damages received for physical and personal injuries or sickness are tax free under I.R.C. 104. That is, even future lost income (which one would have earned and on which paid taxes) is said to be tax free when paid in settlement of a claim for a physical injury. In a general sense, damages which do not arise from physical injury or sickness are included in gross income and thus taxable. Determining the difference between "physical injury" and "emotional damages" is not always as straightforward as it might appear. A decision in the Murphy case suggested for a short time that tax on 'emotional' damages' might be unconstitutional, but that was overturned.
I say this to point out that there is not a straightforward, layman-accessible answer, and that you very much ought to consult a tax professional. Much depends on the way your lawsuit was filed, and the exact causes of action raised. Much also may depend on the terms of the settlement agreement you reached with the school. I would suggest you contact the lawyer that handled the settlement, and obtain from them a referral to a tax professional who is experienced with handling awards and settlements arising from lawsuits.
posted by bunnycup at 12:58 PM on December 11, 2009 [2 favorites]
This seems like something that a simple and quick phone call to your lawyer's office should be able to answer for you free of charge. The legal secretary there should know the correct way to file it.I'm not so sure of that. My wife is a plaintiff's attorney who frequently wins large settlements and she specifically advises people to consult with a tax professional because the issues involved are not black and white. I know that the specific language on the settlement agreement is quite important because my wife often negotiates for the settlement to be worded in particular ways to minimize the potential tax burden. You can get started by reading the relevant section of IRS Publication 525
posted by Lame_username at 1:11 PM on December 11, 2009 [1 favorite]
Nthing talk to a CPA with experience with taxation of legal settlements -- this question is way too complex to be answered on the cheap. The answer depends on the wording in the settlement agreement (how the funds are characterized), the underlying pleadings, upon the facts of the case, and, frankly, upon how aggressive you want to be with regard to taxation.
posted by seventyfour at 2:04 PM on December 11, 2009
posted by seventyfour at 2:04 PM on December 11, 2009
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You probably should consult with a tax professional, unfortunately.
posted by valkyryn at 12:39 PM on December 11, 2009 [1 favorite]