how do i figure out tax due on civil lawsuit settlement? also, what about the 40% lawyer fee?
Comments
Comment from ninasgramma
Time March 31, 2010 at 1:05 am
I agree there is not enough information, but I will give you some general facts. Your settlement may or may not be taxable income. It depends on the type of award.
If your award is not taxable, then the attorney’s fees are also not taxable, and therefore not deductible.
If your award is taxable, then if you were pursuing the award to recover taxable income, then the attorney’s fees are deductible. The fees are deducted on Schedule A as miscellaneous deductions subject to 2% of your adjusted gross income. If you take the standard deduction, the attorney’s fees are irrelevant. Whether you itemize or not, you will end up owing roughly $700 dollars in tax.
If your award is taxable and the award was not a recovery of taxable income, then the attorney’s fees are not deductible and the gross amount of the award appears on your tax return as taxable income.
If this worst case is your situation, then filing MFS with no dependents or other deductions or credits, you are going to owe roughly $700 – $1,200 in taxes depending on whether you take a can take standard deduction or not.
Summary:
Best case: No tax
Worst case: About $1,200 when there is no deduction to take and you have to take a standard deduction of zero if your spouse itemizes.
Comment from Tomk
Time March 31, 2010 at 1:30 am
You can check out page 29 of this adobe document from the IRS instructions to see how your case applies. If you are required to report the settlement, then you report it under INCOME and complete the rest of form 1040. Remember that if your wife itemizes, you must also itemize.
HINT: It is almost NEVER better to file as married and filing separately; you lose a lot of deduction dollars that way. Even if you don’t live together, you would both come out way ahead in refunds if you filed together and just decided how much each would take from the total as his/her refund.
Comment from MJ
Time March 31, 2010 at 12:09 am
This is NOT enough information. You need to at least check out tax info for type of damages you received on irs.gov or some other reputable site like turbotax.com, that has tax info. Generally your legal expenses are deducted from your settlement fee for tax purposes anyway.
Depending upon why or the cause of action that your suit was based upon you may not owe ANY taxes but your question does not provide enough for anyone to answer it from what you wrote at this time.