How much should I set aside for taxes on my legal settlement?
I recently was awarded a legal settlement of $55,000. The party paying the money is planning to pay it out on a 1099, labeled as “emotional distress” damages. I don’t know much about this, except that it will ultimately reduce the amount of taxes that are taken out. The problem is that because they are handing me a lump sum check with the 1099, they are not taking the taxes out in advance. Does anyone know how much of this I should set aside for my taxes next year?
Whether you have to pay tax on the court award or legal settlement depends on what it is for.
After August 20, 1996 a legal settlement or court award received is only tax free if on account of physical injury or physical sickness. Include the following as ordinary taxable income on your tax return:
Interest on any legal settlement or court award;
Compensation for lost wages or lost profits in most cases;
Punitive damages;
Amounts received in a legal settlement or court award of pension rights
(if you did not contribute to the plan);
Damages for:
Patent or copyright infringement;
Breach of contract;
Interference with business operations;
Any legal settlement or court award under the Age Discrimination in Employment Act.
Do not include in your taxable income on your tax return a legal settlement or court award for compensatory damages for personal physical injury or physical sickness.
Emotional distress is not considered a physical injury or sickness; therefore, a legal settlement or court award for emotional distress is includable in taxable income on your tax return. However, a legal settlement or court award up to the amount paid for medical care expenses attributable to emotional distress are tax free and do not need to be included on your tax return.
Obviously if it says “emotional distress” — it’s taxable. I would say that if you set aside 20% you should be safe. However, I’m just basing that on the percentage that is taken from anything that I retrieve from an IRA. (Then I get nailed another 20% at the time I file). Ask a tax advisor – go to google or yahoo and search for one.
Settlement Advance WITHOUT 30 YouTube.mov
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