is this taxable income?

[davew128]

Unfortunately, I believe that the query does relate to the settlement agreement; why is the money being provided?

Refer back to the doctrine "substance over form", "Captian". Counselor Troi advises that something is what it is, not what it says it is.

 

[Captian Picard]

Agreed. It is what it is; your continual claim of what it is has not wavered -- why continue to state your position? There is no need to.

The OP has the advice & opinions to measure & make a determination.

End communication.

 

[Willlyjo]

OP doesn't have a workers compensation claim and workers compensation is specifically referenced in tax law.

So what are you trying to say?

I think you need to read the other Senior Member posts because they even agree that compensation for injuries is not taxable income. You're totally off in another direction here.

 

[LdiJ]

Wow....This thread certainly got out of control...by a lot of people who are not tax professionals.

Bottom line: A settlement is or isn't taxable based on what the settlement actually covers. The wording of a settlement can help determine what it covers, but the wording of a settlement does not "rule" in that respect.

Some settlements are worded very well, and that can make it easy to determine what part is or isn't taxable. However, arbitrarily choosing wording, rather than the wording specifically explaining does not make a difference.

IF, any portion of the settlement is taxable, then a proportional amount of the attorney fees attributable to that amount are deductible on Schedule A. If no portion of the settlement is taxable, then no attorney fees are deductible.

In this instance the IRS is unlikely to believe that none of the settlement was to cover lost wages. Any portion of a settlement covering lost wages absolutely IS taxable.

 

[tranquility]

The bottom line is: If you are compensated for Pain and Suffering and the language in the stipulation (settlement agreement) specifies that fact, then it is NOT taxable!

I believe I posted a specific reference showing why this is incorrect. If you had gone to the audit guidelines, you would see case law is supplied as well.

If you read the guidelines, you will find that the agent doing the audit will, of course, take the settlement letter. They will also take other things. If the settlement agreement was determinative in any way, why would the auditor waste his time?

Or, we could look to a case:

2. Bagley v. Commissioner, (1995) 105 T.C. 396, aff’d, 121 F.3d 393 (8th
Cir. 1997).
This case involved claims for tortious interference with current and future employment, libel,
and invasion of privacy. The trial resulted in a jury verdict that was appealed. A settlement
agreement was reached prior to the new trial. This settlement agreement allocated the entire
award to compensatory. The Tax Court looked to the facts of the case, including the trial
determinations and the negotiations for settlement. The Tax Court determined that a portion
should be allocated to punitive, even though the payor stated in negotiations that they would
not agree to pay punitive damages. The Tax Court determined that both parties considered
the clear possibility of punitive damages being recovered. The Tax Court pointed out that the
taxpayer's attorney became aware of the potential for taxability of punitive during the
negotiations.

 

[terminatedone]

then i need them to take back 1099

 

[tranquility]

No. What you need to do is go to a tax professional who will help you report the settlement appropriately.

 

[davew128]

IF, any portion of the settlement is taxable, then a proportional amount of the attorney fees attributable to that amount are deductible on Schedule A. If no portion of the settlement is taxable, then no attorney fees are deductible.

I will disagree here in that this is a discrimination case based on FMLA and the deductible portion of attorneys fees are taken as an adjustment to income.

 

[terminatedone]

Thank you, but i do not think i asked about attorney fees. i only asked if this was considered taxable income. if it is determined to be taxable income, then i know i can claim the legal fees on my taxes****************************.....cpa is referring me back to attorney to get clarification! attorney is employment law specialist not a tax specialist**************.....so that is why i came here knowing that there are tax law specialist that could help me.

 

[tranquility]

If the people with access to the facts can't help you, we certainly can't.

 

[davew128]

Thank you, but i do not think i asked about attorney fees. i only asked if this was considered taxable income. if it is determined to be taxable income, then i know i can claim the legal fees on my taxes

The nature of the claim is material to not only the fees BEING deductible but also as to WHERE they get deducted. And if you think this is a minor distinction, you're sorely mistaken.

 

[Willlyjo]

Wow....This thread certainly got out of control...by a lot of people who are not tax professionals.

Bottom line: A settlement is or isn't taxable based on what the settlement actually covers. The wording of a settlement can help determine what it covers, but the wording of a settlement does not "rule" in that respect.

Some settlements are worded very well, and that can make it easy to determine what part is or isn't taxable. However, arbitrarily choosing wording, rather than the wording specifically explaining does not make a difference.

IF, any portion of the settlement is taxable, then a proportional amount of the attorney fees attributable to that amount are deductible on Schedule A. If no portion of the settlement is taxable, then no attorney fees are deductible.

In this instance the IRS is unlikely to believe that none of the settlement was to cover lost wages. Any portion of a settlement covering lost wages absolutely IS taxable.

You do not have to be a tax professional to see that the OP's settlement is NOT taxable.

For instance, the settlement agreement speciffically points out compensation for an array of possible claims concerning the OP's circumstances surrounding his employment. The agreement does not zone in on any one factor, whether it be lost wages, pain and suffering, breach of FMLA guidlines, etc...

You'd have to agree it would probably take extensive Discovery and a trial to dissect all the claims and then find some kind of taxable income in the award.

However, this case hasn't gone to trial nor has there been extensive Discovery. The language in the settlement says it is compensating for everything that the Defendant might be liable for. Defendants even admit no liability. OP claims physical and emotional distress. This is conclusive if the OP does indeed have medical records (documentation) to show this.

It is not conclusive that there is lost wages caused by an FMLA breach, which if it were, could manifest itself as taxable wages. If the employer isn't admitting it and the OP isn't pursuing litigation to prove an FMLA breach, it hasn't been proven so it isn't conclusive.

The IRS is not going to waste their resources on trying to prove that this settlement is taxable because the only thing the language shows is that it is being paid for pain and suffering which for all intents and purposes, is the only conclusive element in the case.

Also, I don't believe that an attorney would arbitrarily choose wording that would hide any taxable income. As I experienced and alluded to earlier in this thread, an attorney could inadvertently neglect to word an agreement to the Plaintiff's detriment, by not taking credit for income that shouldn't be taxable, thus resulting in the Plaintiff paying a good chunk of change to the IRS.

 

[davew128]

You do not have to be a tax professional to see that the OP's settlement is NOT taxable.

Apparently, Mr. Village isn't aware that the preparer penalties for taking this position would most certainly be imposed on him for providing this advice to the OP.

 

[Willlyjo]

I believe I posted a specific reference showing why this is incorrect. If you had gone to the audit guidelines, you would see case law is supplied as well.

If you read the guidelines, you will find that the agent doing the audit will, of course, take the settlement letter. They will also take other things. If the settlement agreement was determinative in any way, why would the auditor waste his time?

Or, we could look to a case:

Let me tell you why I disagree with you. For one thing, this case has not gone to trial.

And if an IRS agent as you say, would take the totality of what is said in the agreement, they would have to conclude that (as I pointed out in a previous thread) since the employer mentioned that compensation was for mental and physical injury (among other things), the OP agrees and has it documented and it is the only element of the claim that is conclusive, it is indeed NOT TAXABLE income.

But, hey...let's see what happens. OP, please let us know what final conclusions come out of what I believe is your non-taxable-income settlement.

 

[Willlyjo]

Apparently, Mr. Village isn't aware that the preparer penalties for taking this position would most certainly be imposed on him for providing this advice to the OP.

Hmmm...what kind of penalties are you talking about? Who is going to be penalized?

The OP has a right to not report income if he believes it isn't taxable income. If the IRS gets knowledge of the settlement via the employer's (sic) 1099, they will get in touch with the OP and ask him why he didn't report it.

As I did when this happened to me, I told the IRS that my compensation was not taxable income and that my employer 1099'd me just to harass me. No penalties, no taxes.

Also, I'm sure that if the most improbable should happen and the OP does get taxed by the IRS, he won't pay any penalties anyway because the IRS excuses penalties if the OP has a good reason for not reporting what the IRS determines (very improbable ) to be taxable income.

So...even playing devils advocate here, there is no way the OP will get in trouble with this. The worst case senario is that the OP will end up paying some taxes (stress-IMPROBABLE). The best case senario (and it is obvious to me in my opinion) is that it is tax-free.

Now I'm done responding to you David--go back to your village.