identity theft settlement

[4brownangels]

What is the name of your state? IN
Last February, my husband and I settled out of court in an identity theft case. We were told that our settlement was not going to be taxable, but in February of this year we received a 1099 from the company we settled with. Now, our CPA is telling us that our settlement is taxable. Our lawyer says he doesn't know. Is it taxable or is it not?

[LdiJ]

Originally Posted by 4brownangels

What is the name of your state? IN
Last February, my husband and I settled out of court in an identity theft case. We were told that our settlement was not going to be taxable, but in February of this year we received a 1099 from the company we settled with. Now, our CPA is telling us that our settlement is taxable. Our lawyer says he doesn't know. Is it taxable or is it not?

A settlement that is compensatory, but does not replace income that would normally be taxable, is not reportable or taxable income.

A settlement that is punitive, rather than compensatory, or that replaces income that would normally be taxable, is taxable income.

Take your settlement paperwork and the 1099, and go get a second opinion from another local tax professional....however, odds are that your CPA is correct.

[4brownangels]

Thank you for your swift reply. Based on what you said, I thought I might give you a little more information about our specific case. We were rewarded our settlement not for punitive damages, but it was not to replace wages lost. The settlement was mostly based on harressment and a loss of money due to the inability to refinance our house at a lower interest rate because of the identity theft. From what I understand of your previous answer, then, we should not have to pay taxes on that money. Is that right? Also, the company we settled with sent us the 1099 for an amount of money over what we settled for, so the 1099 is faulty. Any thoughts or advice?

[LdiJ]

Originally Posted by 4brownangels

Thank you for your swift reply. Based on what you said, I thought I might give you a little more information about our specific case. We were rewarded our settlement not for punitive damages, but it was not to replace wages lost. The settlement was mostly based on harressment and a loss of money due to the inability to refinance our house at a lower interest rate because of the identity theft. From what I understand of your previous answer, then, we should not have to pay taxes on that money. Is that right? Also, the company we settled with sent us the 1099 for an amount of money over what we settled for, so the 1099 is faulty. Any thoughts or advice?

Is the difference the amount of money that was paid to your attorney? Who was the company that you settled with? Normally identity theft is committed by a person rather than a company. Was it that person's insurance company?

Again, I really think that you need to take your settlement paperwork and the 1099 to another local professional to get a second opinion. From what you are saying, it sounds like its compensatory, therefore not taxable, but without being able to read the paperwork I really cannot be certain.

If the income is taxable, then the money you paid your attorney was an expense of gaining income, therefore the amount you paid your attorney would be deductible.

[tranquility]

You have a complex situation where the answer is not clear. For example, you received "damages" for the difference between the interest you paid on your house and the interest you could have paid if you could have refinanced. This seems like income to me for two reasons. One it is not in the nature of a personal injury nor is it capital which is destroyed which would fall under statutes to exclude those from income. Two, is the tax benefit rule. You received a tax benefit for the additional interest paid, right? You probably deducted the amount on your return as mortgage interest. At least to the extent you received benefit from the deduction, you would have to include that amount in your income.

The amount which was received for harrassment is clearly taxable as it is not excluded by Sec. 104(a)(2).