How do settlements get taxed? Well, that really depends on the type of settlement. Physical injury damages are not taxable, but the compensation will be taxed after you deduct your medical expenses. It's also important to remember that you can't take the same tax break twice. Fortunately, the IRS is pretty easy to work with. Here are some tax-saving tips for lawsuit settlements. Let's take a look.
The best way to understand how lawsuit settlements are taxed is to consider their value in terms of the amount of money you're receiving. The money you're receiving from a lawsuit settlement is money you should have been paid. That's taxable income. However, if the amount is less than the value of your property, it won't be taxed. If it's more, you'll need to pay self-employment taxes on the recovery.
If you're getting emotional distress damages from an accident or home intrusion, your settlement may not be taxable. If the distress was a result of physical injury, however, these damages will be taxable. Regardless, you may not have to pay taxes on these damages. The IRS doesn't recognize the fact that emotional distress damages may also result from physical injury. Luckily, most emotional distress damages are tax-exempt.
In addition to the amount of money you receive, settlements may contain clauses that prevent you from disclosing the terms of the settlement agreement. However, if you can't get your hands on a copy of the agreement, don't worry. The IRS has a good record of accepting settlement agreements. Just make sure you follow the terms of the settlement agreement to avoid getting caught without paying taxes on them. That way, you'll be able to maximize the benefits of your settlement.
Although money damages awarded in lawsuits can be taxed based on their original purpose, punitive damages are not. These are awarded when a defendant's behavior was outrageous or unjust. If they're taxable, they will be taxed at ordinary income rates. This can result in an increase in attorney fees. The tax code is very complicated and is updated frequently, so determining if your settlement is taxed depends on your circumstances.
If your settlement involves a claim for physical injury, taxable damages will be treated as wages. You might even be subject to taxation if you also received compensation for emotional distress. In California, a settlement award for mental or emotional distress will be taxable. The taxation of emotional distress and pain, on the other hand, will not be taxable. A qualified attorney can help you navigate these complicated tax rules. It's important to understand what your settlement is worth before accepting the final award.
While settlements can be substantial, you'll want to double-check the tax implications before accepting a check. In general, it's best to seek legal counsel from an attorney to make sure you understand how your settlement will be taxed. Remember, though, that a large settlement check may mean a large tax bill. So, it's a good idea to seek professional legal assistance before you cash in your settlement check.