settlement - tax exposure

[rhh]

What is the name of your state? ca

ok, so i settle or win a case in court. fyi..breach of contract or wrongful termination.. am i exposed for paying taxes on the total award? to be specific......if i have a continigency with an attorney is he paid his fee and associated costs seperate from my reward? if not, that really creates a big tax liability for me and significantly reduces the true net of a case.

hope i made the scenario clear?

thanks in advance.....

 

[tdavidl]

you got it. gross settlement is reportable as income (above the line) and any expenses associated with the creation of that income (your legal fees) are deducted as a misc itemized deduction subject to 2% of AGI.


it ain't fair, so goes the tax code......

 

[anteater]

But, if the settlement is big enough, it's AMT time and goodbye to the deduction for legal fees. Right?

Didn't the 2004 tax law only give relief on the legal fee deduction for discrimination cases?

 

[rhh]

thanks for the response...please more feedback!

the 2 percent rule. does that mean i'm only allowed 98 percent of the amount as an item deduction?

i think the only way i walk away with any kind of moeny is for an installement pay method..if allowed??

please more dialogue..

thanks in advance....

 

[rhh]

and is there any way around the expoure of the attorney fees? meaning...a check is cut to him directly and i'm not exposed to the tax liability. that is a killer!

 

[anteater]

Read it and weep.

http://www.clelaw.lib.oh.us/Public/DECISION/US/012405.html

The tax law of 2004 made some changes, but apparently only for unlawful discrimination claims:

"For a judgment or settlement occurring after the enactment date, the Act allows an above-the-line deduction for attorney's fees and court costs incurred in connection with an unlawful discrimination claim."

 

[tdavidl]

go to www.irs.gov, search for instructions for form Schedule A, misc itemized deductions and you'll see how the 2% works.

right you are with AMT, that nasty back-door tax......

yes, if you have a choice, go for an installment deal, have them purhcase an annuity to make the payments.

this can keep the income in lower tax brackets....it may also help with the 2% issue for the legal fees in year 1 since AGI won't be as high either, confirm that w/ a tax professional.