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5 Things to Know About Taxes on Lawsuit Settlements

In the United States, there are over 40 million lawsuits filed every year.

If you happen to have a lawsuit,  there are some things you should know. Taxes on lawsuit settlements do exist and understanding some key principals behind how those taxes affect you is important.

Taxes on Lawsuit Settlements 

Taxes on lawsuit settlements exist for almost any money awarded. These taxes are either paid before or after your attorney fee. It is important to know which situation you fall into. If you are awarded money, taxes come out of the total regardless of whether attorney fees have been removed.

1. Taxes on Settlements and Judgements Are the Same 

It doesn’t matter whether you win a settlement or a case that has gone to court. In both cases, you will be expected to pay taxes on the money awarded if applicable. While there may be more flexibility in the case of a settlement, you will still need to keep all of the paperwork in case of an audit.

2. There Are Some Exceptions 

Under U.S. law, personal injury and personal sickness damages are not taxed. If your settlement or judgment relates to these specific circumstances, you won’t be taxed. These are the only broad exceptions that are allowed. Thus, there will often be no taxes on personal injury lawsuits.

3. How the Settlement Is Taxed Depends on the Situation 

Before you pay taxes on lawsuit settlements, consider how that settlement will be taxed. If it is done through judgment, you could still be liable for taxes on the pre-or post-judgment interest. Depending on the size of the settlement, this can become quite a bit of money.

One of the best things you can do in this case is to allocate damages and taxes in agreement with the defendant. While these agreements are not legally binding, they are often accepted by the IRS.

4. Time Passes and Lawsuits Can Continue to Drag On 

Due to the nature of the legal system, judgments and settlements often take a long time. This can complicate the tax issue, and even worse, you may find yourself running out of money. Lawsuit cash advance loans can be a solution to the problem you are facing.

5. It Is Important to Decide How the Declare the Money 

One of the most important things when determining how much tax on a lawsuit settlement is how you will declare this income. If not related to lost income or profits, there are circumstances you can claim the money as capital gains. This will reduce the overall amount of taxes you will have to pay.

A Complicated World 

It is hard to understand the intricacies of the tax code. Taxes on lawsuit settlements can be complicated and varied based on the type of judgment and case you have. If you have any questions, you should speak to an attorney or other tax professional. It is always better to be safe than sorry when dealing with taxes.

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