SETTLEMENT CONTINGENCY FEE INCOME TAX

[consumerflorida]

Assume someone resides in Texas and gets a settlement in CA .

The settlement is 80 K. No pain and suffering settlement.
The "source of origin" of the settlement is an undue influence claim . The person was defrauded and should have in the fraudulent will received 5K , now he settles his claim for 80 K. The lawyer was retained on a contingency fee basis and gets 50% . The person is a single filer.

Is the settlement , which is "a distribution of the trust" taxable income , can he deduct the contingency fee.? How much will he have to pay taxes ? I
Thanks

 

[zddoodah]

Assume someone resides in Texas and gets a settlement in CA .

If you want us to assume this, you'll have to clarify exactly what "gets a settlement in CA" means. I could probably come up with half a dozen things that it might mean, but I don't like guessing.

The settlement is 80 K. No pain and suffering settlement.
The "source of origin" of the settlement is an undue influence claim . The person was defrauded and should have in the fraudulent will received 5K , now he settles his claim for 80 K.

OK...so...the person receiving the settlement is an heir of some deceased person, and the heir claimed that some other person used undue influence to cause the deceased person to leave the heir only $5k. So far so good? And the settlement resulted in the heir receiving $80k. Correct? Was the source of this money the deceased's estate?

Is the settlement , which is "a distribution of the trust" taxable income

Wait...what? Earlier in your post, you told us that this relates to a "fraudulent will." If that's the case, why are you now referring to it as "a distribution of the trust"?

How much will he have to pay taxes ?

If it's taxable, you have not provided sufficient information for anyone to answer this question intelligently.

 

[Taxing Matters]

Assume someone resides in Texas and gets a settlement in CA .

The settlement is 80 K. No pain and suffering settlement.

Well, there'd be no pain and suffering in an undue influence claim as there is no physical injury.

The "source of origin" of the settlement is an undue influence claim . The person was defrauded and should have in the fraudulent will received 5K , now he settles his claim for 80 K. The lawyer was retained on a contingency fee basis and gets 50% . The person is a single filer.

What accounts for the difference between the $5,000 he was to get from the will and the $80,000 he is receiving? Generally in an undue influence case what the plaintiff gets is what he would have received without the undue influence, which you seem to be saying is $5,000. So what is the other $75,000 for?

Is the settlement , which is "a distribution of the trust" taxable income , can he deduct the contingency fee.?

If his claim was against the estate for undue influence in execution of the will, why is the payment coming from a trust? Whose trust is it? Was it a revocable living trust that the decedent created before he died or some other kind of trust?

The questions I've asked so far all go towards figuring out if the settlement is taxable income.

As to deduction of the contingent fee paid the lawyer, the answer to that is clearly no, you cannot deduct it even if the settlement is taxable income. You can thank the Trump 2017 tax bill for that, because before 2018 you could deduct legal fees paid to produce taxable income. Now, you can't.

How much will he have to pay taxes ?

No way to answer that without first determining how much of the settlement is taxable, and then looking at what other income he has during the year, what deductions and credits he has, etc. He'll likely need to see a tax professional to run those numbers for him.

 

[LdiJ]

Assume someone resides in Texas and gets a settlement in CA .

The settlement is 80 K. No pain and suffering settlement.
The "source of origin" of the settlement is an undue influence claim . The person was defrauded and should have in the fraudulent will received 5K , now he settles his claim for 80 K. The lawyer was retained on a contingency fee basis and gets 50% . The person is a single filer.

Is the settlement , which is "a distribution of the trust" taxable income , can he deduct the contingency fee.? How much will he have to pay taxes ? I
Thanks

If you don't normally use a tax professional to prepare your taxes, this year is the year to do so. You need someone who can ask you lots of questions to determine, what, if any of that money is taxable income. You need someone who has good experience in dealing with both lawsuit settlements AND inheritance situations.

There is a possibility that none of it is taxable. There is a possibility that some of it is taxable, and there is a possibility that most of it is taxable. It all depends on the serious details of the situation.

 

[consumerflorida]

Gets a settlement means that the person is receiving a settlement, in other words in a legal proceeding a stettlement was reached. Okay. The case took place in California, but the person who filed the lawsuit now resides outside of California ( no state taxes!) Meaning the petitioner is now a non resident of California. Nothing unclear about that .-
The person would have received 5 K in the trust that the person opposed. Okay. Now the person had evidence that this the last version in which he received only 5 is - lets say it this way - very problematic and the parties therefore agreed -after threatening to go to court - to settle all of this . So instead of doing these they settled Question
What is with the 80K I am referring to it as a distribution of the trust since that is what the settlement payment is called in the agreement - having in mind the source of origin theory
are they

a) taxable income as an inheritance, if so is there a tax liability and if how much ?
b) taxable income as a settlement ,if so is there a tax liability and if how much ?
if they are taxable income as a settlement can you deduct the contingency fee of the lawyer .
In prior reply no clear answer was given - if you say it depends on the "details" on what "details" does it depend ?
If both is a possibility then kindly explain the tax liability under scenario a and b.
My take is that is goes back to the origin of the source theory - that settlement money is classified as what the source of the income is - on this case the money's original source would be an inheritance - meaning both parties agree (after threatening to have trail) that the recipient should get as an inheritance 80K
What is then the tax liability -no federal inheritance tax, non CA citizen ergo no tax liability.
If you come to the conclusion depending on the "details' it is not an inheritance then as I understand you have 80 K income ( the lawyer worded on a contingency fee ) but still 80K - you cannot take the 50% contingency fee the 40K off you are liable for 80K income but you take with the costs and legal fees later the 40 K off and you miss out on the standard deduction. Is that correct ?

 

[Taxing Matters]

The details of the trust, the lawsuit and the settlement matter and you are not explaining it very well. You've now at least clarified that the case was for undue influence with regard to a trust, not a will, which explains why the trust is making the payment. But there are still things that are unclear here.

First, are you saying that the $5,000 is what the trust would have paid you before the undue influence contest? And you pursued the undue influence case in a claim that you were due more than $5,000? And if that's correct, what exactly does the $80,000 represent here? Is that the amount the parties agreed you are to receive as your share of the trust? Or does it include compensation for other things, too, like interest, punitive damages, etc?

One thing is clear. Even if some or all of the settlement is taxable, you cannot exclude or deduct the amount of the contingent fee you paid the lawyer from the taxable income.

 

[consumerflorida]

Thank you for your quick response.
1) First, are you saying that the $5,000 is what the trust would have paid you before the undue influence contest?
Correct
2) And you pursued the undue influence case in a claim that you were due more than $5,000?
Correct
3) What exactly does the $80,000 represent here?
Is that the amount the parties agreed you are to receive as your share of the trust?
Correct
4) Or does it include compensation for other things, too, like interest, punitive damages, etc?
None of that, it is the the amount the parties agreed that I am to receive as share of the trust
The 80 K are according to the settlement a distribution of the trust as if I had inherited that amount in the
trust version which I contested meaning a legal fiction that we agree I should have gotten it in the version which
only gave me 5 K. So I am legally deemed to have gotten 80 K (in the version I contested) although in reality
it said only 5K.