A Guide to the Tax Implications of a Legal Settlement

This  is  a two-part article addressing questions that
arise when people receive lump sums. For the entire article, go to: www.Profile-financial.Com/settlement. I recently helped a number of people who are
in the midst of receiving a cash settlement from a lawsuit, and had to point out that
winning a lawsuit is not free money. In addition to having survived personal injury
and a long-drawn out legal case, there may be tax implications to a legal settlement.

Lost wages or profits
If you are unfairly dismissed from employment, you may receive a settlement for lost wages,
benefits, severance, back pay, or other income. According to the IRS, this settlement is considered
regular income, even though severance pay is often tax free in Israel. This kind of settlement is also subject to
the Social Security wage base table and Medicare tax rates for the year in which you were paid. Reporting legal compensation for lost wages
is similar to reporting income for regular pay when you were employed.

Interest payments
Interest on any settlement, as with any income, is taxable and should be reported as interest
income. Punitive damages
Punitive damages are taxable and therefore must be reported, even if received in a settlement
for personal or physical illness or injuries. Estimate tax
Make estimated tax payments early if you know youre going to owe at least $1,000 in income
tax from having to report receipt of a legal settlement amount. Taxation on settlements is complicated.

Remember to speak with a qualified tax advisor
to get advice since this article is just for general information. We help people manage their U.S. Investment
account, not file their tax returns. Free information
To get this complete article along with the IRSs information about what you need to
report to the IRS regarding a legal settlement, go to: www.Profile-financial.Com/settlement.