Is my civil settlement taxable?

[Harmonygrl]

What is the name of your state (only U.S. law)? Kentucky


I'm curious to know if a settlement obtained in a civil case would be taxable . The settlement would be reimbursements from a business whose negligence damaged personal property. The settlement would include costs to remediate property damage as well as attorney's fees. No punitive damages are being sought.

Thanks for reading my post.What is the name of your state (only U.S. law)?

 

[mtpockets]

How were expenses treated?

Your settlement is a recovery of expenses that, presumably, have already been deducted. The recovery should be recognized as income in the year received.

 

[Harmonygrl]

Thanks for the reply. I'm not sure I understand about deducted expenses?

I paid for services to my home and attorney's fees with my after-tax income. I didn't take any specific deductions on my taxes for these costs.

Can you please explain further or let me know if you need more information? Thanks!

 

[LdiJ]

What is the name of your state (only U.S. law)? Kentucky


I'm curious to know if a settlement obtained in a civil case would be taxable . The settlement would be reimbursements from a business whose negligence damaged personal property. The settlement would include costs to remediate property damage as well as attorney's fees. No punitive damages are being sought.

Thanks for reading my post.What is the name of your state (only U.S. law)?

Some civil settlements are taxable, however if you have described things accurately, this one would NOT be taxable. The settlement that covers the repair or replacement of damaged personal property, and legal fees, is not taxable.

However, be sure to consult a tax professional, with the settlement documents in hand, to be certain that there are no taxable elements.

 

[Harmonygrl]

Thanks for the reply. Would my attorney also be able to advise me to know if I've accurately described the terms etc.?

Some civil settlements are taxable, however if you have described things accurately, this one would NOT be taxable. The settlement that covers the repair or replacement of damaged personal property, and legal fees, is not taxable.

However, be sure to consult a tax professional, with the settlement documents in hand, to be certain that there are no taxable elements.

 

[LdiJ]

Thanks for the reply. Would my attorney also be able to advise me to know if I've accurately described the terms etc.?

Not necessarily. Many attorneys think that they know something about tax, but quite often they have no clue what they are talking about. (unless they also happen to be tax attorneys).

You need a tax professional to read over the settlement paperwork in order to be able to tell you for certain whether or not its taxable.

However, I will give you an example:

If someone runs a car into your house and you sue, and they settle for the cost of the repair plus your legal fees, that's definitely NOT taxable.

However, if in the same scenario they settle for the same, plus pay you an additional amount for emotional distress, that portion is probably taxable. If they include an amount for lost wages for the time you had to take off from work to deal with the house, that is definitely taxable.

 

[Harmonygrl]

Thanks for your help. It definitely sounds like my situation is the first one and not taxable. I don't have a settlement offer drawn up yet, but I wanted to be aware of any tax implications so that can be considered as part of the total picture. However, in my case, it sounds like there wouldn't be any.

Not necessarily. Many attorneys think that they know something about tax, but quite often they have no clue what they are talking about. (unless they also happen to be tax attorneys).

You need a tax professional to read over the settlement paperwork in order to be able to tell you for certain whether or not its taxable.

However, I will give you an example:

If someone runs a car into your house and you sue, and they settle for the cost of the repair plus your legal fees, that's definitely NOT taxable.

However, if in the same scenario they settle for the same, plus pay you an additional amount for emotional distress, that portion is probably taxable. If they include an amount for lost wages for the time you had to take off from work to deal with the house, that is definitely taxable.

 

[LdiJ]

Thanks for your help. It definitely sounds like my situation is the first one and not taxable. I don't have a settlement offer drawn up yet, but I wanted to be aware of any tax implications so that can be considered as part of the total picture. However, in my case, it sounds like there wouldn't be any.

Again, while it sounds like none of it is taxable, the way that the eventual paperwork gets drawn up may change that...so again, see a tax professional, if possible before signing any settlement agreement.

 

[tranquility]

Determination of taxability can be a more subtle and difficult thing than you may suppose. I hate the decisions. Mistakes are expensive. If the settlement is of any serious amount, see a tax professional.