I have heard that it may be beneficial to have the company we are settling with send out 2 different 1099s next year, 1 to me and 1 two my attorney with my 1099 indicating just the 60% I would be getting and not the full 100% we settled on.
Is this possible and if so how/why would this be advantageous? Also, if you have any other suggestions or ideas to lessen the taxes on the settlement, I would greatly appreciate your assistance.
at is the name of your state? Colorado
The 1099 to you must show the entire settlement amount. That's what the tax law requires. It is also what you will need to include as income on your tax return. The U.S. Supreme Court made that very clear, saying:
We hold that, as a general rule, when a litigant’s recovery constitutes income, the litigant’s income includes the portion of the recovery paid to the attorney as a contingent fee. We reverse the decisions of the Courts of Appeals for the Sixth and Ninth Circuits....
The attorney is an agent who is dutybound to act only in the interests of the principal, and so it is appropriate to treat the full amount of the recovery as income to the principal. In this respect Judge Posner’s observation is apt: “[T]he contingent-fee lawyer [is not] a joint owner of his client’s claim in the legal sense any more than the commission salesman is a joint owner of his employer’s accounts receivable.” Kenseth,259 F.3d, at 883. In both cases a principal relies on an agent to realize an economic gain, and the gain realized by the agent’s efforts is income to the principal. The portion paid to the agent may be deductible, but absent some other provision of law it is not excludable from the principal’s gross income.
Commissioner v. Banks, 543 U.S 426 (2005). It was an 8-0 decision, with the Chief Justice not participating in the case. As the entire award is taxable income you, that's the amount that must be reflected in the 1099-MISC given to you.
The full amount of the settlement must also be reported to the attorney on a Form 10990-MISC. Treat. Reg. § 1.6045–5
However, the two amounts are reported on the Forms 1099 slightly differently. From the Form 1099-MISC instructions:
For example, a person who, in the course of a trade or business, pays $600 of taxable damages to a claimant by paying that amount to a claimant's attorney is required to:
- Furnish Form 1099-MISC to the claimant, reporting damages pursuant to section 6041, generally in box 3; and
- Furnish Form 1099-MISC to the claimant’s attorney, reporting gross proceeds paid pursuant to section 6045(f) in box 10.
Box 10 is a box specifically for payments made to attorneys. That's how the IRS will know that the entire $100,000 is not the attorney's fee. Requiring the reporting this way does not require the plaintiff and his/her attorney to disclose to the defendant or defendant's attorney how much the plaintiff's attorney was paid for his/her services as that is generally confidential information.
The bottom it is illegal to issue the Forms 1099-MISC as whatever source you looked at suggested. The manner of reporting is not optional and the defendant must send the Forms 1099-MISC as described above. Assuming the defendant consults with their attorney or tax advisor the defendant should reject that request if you made it. Even if it was reported that way, you are still obligated to report the full settlement amount as part of your gross income.
The Trump tax passed at the end of 2017 did away with most non-business deductions of attorneys fees.
However, there is a key exception: attorneys fee in settlements or awards won in many employer discrimination/retaliation cases are deductible and, even better, those attorney's fees deductions are what tax pros call an "above the line deduction" which means it's a deduction that reduces your adjusted gross income. That gives the same tax benefit as if only the portion you received was included in your income. I recommend you see a tax attorney to determine if you qualify for that deduction. I make that recommendation over other types of tax professionals because in this instance you need an attorney to review the legal claim you had and the terms of the settlement and provide you with a opinion of what parts, if any, are for the kind of discrimination/retaliation claims that the tax law allows you to do. In order to do that, you need a legal determination of what exactly the nature of the lawsuit was, and that constitutes legal advice that only an attorney may provide.
What I've provided here is general information on what the tax requires and not specific legal advice. I don't have all the information needed to determine the final outcome of how much of your settlement will ultimately be subject to tax. For that, you need to provide all the relevant information to the tax attorney.
