It seems like you have to pay taxes and more taxes on everything. Think about it: You earn a dollar, you pay employment-related taxes on it. If you spend that same dollar at the grocery store, you pay more taxes. If you are a business, it’s worse. When you earn money by selling goods and services, you pay taxes. Then you pay federal taxes on that dollar. And then, when you spend it, you’re paying more taxes. Luckily, Florida doesn’t have a personal income tax. It doesn’t tax settlements, either. Florida does, however, have a real estate tax and a sales tax. If you win a settlement, read on to see how it could affect your taxes and then contact a tax attorney at France Law to help your settlement.
Federal Settlement Taxes
Depending on the type of settlement you win, you might have to pay taxes to the Internal Revenue Service. The tax code has many loopholes for settlement taxes, but you probably won’t get out of paying for most of the settlement. A tax attorney at France Law will be able to tell you what part of your settlement is taxable.
When Settlement Compensation Is Not Taxable
If your settlement is for physical injuries, the settlement is not taxable. But, it’s not that cut-and-dried. Many settlements have three types of damages, especially if you have to take the defendant to court because the insurance company doesn’t make you a fair and reasonable offer, or because you might be entitled to punitive damages. Those damages are economic, non-economic, and punitive damages.
Economic damages cover things like medical expenses and lost wages. If the medical expenses are for physical injuries, you do not pay tax. You will probably have to pay taxes on lost wages. The IRS figures that you would have paid taxes on that money anyway, so it is going to charge you for taxes on past and future lost wages.
Another item that might be subject to tax is the compensation you receive for emotional distress. However, in some cases, the money you receive to pay for therapy sessions for emotional distress might not be taxable, depending on your case. Always contact a business law attorney if you receive a settlement.
The court only orders punitive damages if the defendant’s actions were grossly negligent or intentional. You might receive punitive damages as part of a negotiated settlement, too. Either way, punitive damages are always taxable, as the IRS considers them as income. Punitive damages are not awarded for making you whole or for covering injuries or other losses. Instead, punitive damages are awarded when the court wants to punish the defendant for his or her egregious behavior.
Certain settlements have nothing to do with physical injuries, and those are always taxable. These might include:
- Business settlements;
- Intellectual property settlements;
- Contract settlements; and
- Other settlements for negotiations and lawsuits for reasons other than physical injuries.
If you win $100,000 in a settlement and your attorney takes 33 percent as agreed, you might think that you are only paying taxes on $67,000. However, the IRS considers the entire amount income; thus, you will have to pay taxes on the entire $100,000.
Before you agree to a settlement, let your business law attorney or personal injury attorney hash out what parts of the settlement will be taxed. You might think that part of your settlement is not taxable because that money paid for psychological therapy because you suffered long-term injuries in an accident. Still, if the defendant sends you a 1099 with that amount included, you will have to pay taxes on that part of the settlement.
It’s easier to determine the taxable amount and include that in your settlement agreement or final judgment than to have to deal with the IRS after the fact because you didn’t claim money that was listed on your 1099.
Contact France Law
If you are ready to receive a settlement or have received a settlement, contact France Law at 850.224.1040 to learn more about paying taxes on your settlement and for advice on managing your settlement.