[suedinaz]

Does anyone know how this is handled? I mean- are there taxes (I would assume) on settlements? If so- am I taxed on the entire amount of the settlement or just the amount of my portion after the attorney takes his fees? Any advice would be appreciated! Thanks!

[direred]

Well, you get a 1099. Since I have ongoing writing income, I figured it was close enough to toss it on that particular Schedule C. It was, at least arguably, "writing income."

[Qtip]

Originally Posted by direred

Well, you get a 1099. Since I have ongoing writing income, I figured it was close enough to toss it on that particular Schedule C. It was, at least arguably, "writing income."

The big Ca's will 1099 you, I have gotten away with no 1099 on smaller Ca's.

[roybean]

Originally Posted by Qtip

The big Ca's will 1099 you, I have gotten away with no 1099 on smaller Ca's.

Ditto!

[stargazer0725]

Originally Posted by roybean

Ditto!

Make that 3!

And actually, I just realized what a weird 1099 was that came in for $900. It was a $900 settlement that was issued by a large JDB. But the 1099 was issued by Sallie Mae. Isn't that weird?? I had no idea what is was for.

[Enigma]

Originally Posted by suedinaz

Does anyone know how this is handled? I mean- are there taxes (I would assume) on settlements? If so- am I taxed on the entire amount of the settlement or just the amount of my portion after the attorney takes his fees? Any advice would be appreciated! Thanks!

The entire amount.

Here is what the US Supreme Court had to say:

http://www.law.com/jsp/article.jsp?id=1106573714266
Supreme Court: Contingent Fees Taxable to Client
By Tony Mauro
Legal Times
01-25-2005


In a pair of cases with potential pocketbook impact on lawyers and their clients, the Supreme Court ruled on Monday that the contingent fee portion of lawsuit settlements and awards is taxable to the client, even if the money goes directly to the attorney.

But initial reaction to the 8-0 decision was more muted than expected because a law passed by Congress last fall limits the ruling's implications, and the decision won't doom the contingent fee system, which fuels a broad range of private litigation.

While the cases -- Commissioner of Internal Revenue v. Banks and Commissioner of Internal Revenue v. Banaitis -- were pending last fall, Congress passed a provision allowing taxpayers who win awards in employment, whistleblower and civil rights litigation not to count attorney fees and court costs as taxable income. Congress already allows this for lawyer fees in personal injury cases.

In addition, Justice Anthony Kennedy, in his opinion for the Court, explicitly said he was not ruling on the tax implications of other federal laws that provide attorney fees, some of which exceed the award the plaintiff receives.

But in other types of commercial litigation under federal and state law, experts forecast more costly settlements in light of Monday's ruling because winning plaintiffs may insist that the extra tax they have to pay be tacked onto the settlement.

"Congress pre-empted the worst possible impact of today's rulings," said Jennifer Brown, legal director of Legal Momentum (formerly the NOW Legal Defense and Education Fund), which worried that a ruling against the taxpayer would discourage public interest litigation. "But we are still concerned about other cases in which the contingency fee offers the only means of access to the courts for people of ordinary means."

Jeffrey White, lawyer for the Association of Trial Lawyers of America, said, "Now, in some cases, when both sides sit down to discuss settlement, you'll have to evaluate the tax consequences on the individual plaintiff and maybe hire a tax consultant. It will get a lot more complicated."

William Perry Pendley of Mountain States Legal Foundation, who filed a brief in the case on behalf of several public interest law firms, was disappointed that Justice Kennedy sidestepped the tax issue as it relates to fee awards mandated by federal fee-shifting statutes.

Often, Pendley said, clients of his organization and similar groups are seeking injunctive relief or small awards, not huge sums. If those clients are forced to pay taxes on the attorney fees that go to the public interest law firm, they would in effect be penalized for winning.

"It's a shame that the Court punted on the fee-shifting issue," said Pendley, who predicted that litigation with the Internal Revenue Service over this issue will now resume.

The issue of whether or not contingent fees count as income to the client has been simmering in the courts for years, mainly for taxpayers using the Alternative Minimum Tax, which does not allow for the deduction of attorney fees. Taxpayers have complained that the tax amounts to double taxation because the lawyer pays taxes on the fees, whether or not the client does.

The IRS claims that an entire award or settlement counts as income to the plaintiff, no matter what happens to any part of it. The issue went into the courts, most often in the employment law setting, and usually the IRS won. But with adverse rulings in the 2nd, 4th, 6th, 9th and 11th circuits in recent years, the IRS appealed to the Supreme Court for resolution.

Kennedy complied, stating 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." Kennedy said the plaintiff in a lawsuit at all times "retains dominion" over the income-generating asset -- namely the cause of action stemming from a legal injury.

The Court also rejected an argument advanced by some taxpayers that the attorney-client relationship is a sort of partnership or joint venture for tax purposes. Rather, Kennedy said it is a "quintessential principal-agent relationship." The fact that the client relies on the lawyer to achieve a result the client could not reach alone "does not alter the fact that the client retains ultimate dominion and control over the underlying claim." As a result, the resulting award counts as income to the client, Kennedy ruled.

Kennedy also said that the ruling does not affect qui tam actions under the federal False Claims Act, in which private citizens, acting on behalf of the United States, can recover awards for government fraud they uncover.

Chief Justice William Rehnquist, who did not attend the Nov. 1 argument in the tax cases, did not participate in the decision.

[Enigma]

The best course of action is to pay the taxes even though a 1099 is not received.

[direred]

Originally Posted by Qtip

The big Ca's will 1099 you, I have gotten away with no 1099 on smaller Ca's.

I got one from everyone.

[Hedwig]

I believe that there are some settlements that are tax exempt, aren't there, Enigma? But it's limited, and they may have changed the law.

I had a settlement for an auto accident, and they said it wasn't taxable. But I think it was because it was based on actual damages--doctor bills, lost time from work, etc. I was told that even though I was paid for the items from another source (like sick leave) I was still entitled to recover and it was tax exempt. I believe if I had claimed pain and suffering that would be taxable.

Is that correct? If so, it makes sense that the settlements we get for violations are taxable, because it isn't based on actual damages. Is that only for personal injury like car accidents, and have they changed the law since then?

[Enigma]

Originally Posted by Hedwig

I believe that there are some settlements that are tax exempt, aren't there, Enigma? But it's limited, and they may have changed the law.

I had a settlement for an auto accident, and they said it wasn't taxable. But I think it was because it was based on actual damages--doctor bills, lost time from work, etc. I was told that even though I was paid for the items from another source (like sick leave) I was still entitled to recover and it was tax exempt. I believe if I had claimed pain and suffering that would be taxable.

Is that correct? If so, it makes sense that the settlements we get for violations are taxable, because it isn't based on actual damages. Is that only for personal injury like car accidents, and have they changed the law since then?

Correct.

The type of settlements you describe are not taxable. But the IRS is trying.

[Hedwig]

If the IRS had their way, every dollar in the economy would be taxed at least a dozen times.

[acebo]

If you were insolvent at the time of the 1099-C, the "income" is exempt. Source. Or you can google "1099-C" and "insolvent."

[Enigma]

Originally Posted by acebo

If you were insolvent at the time of the 1099-C, the "income" is exempt. Source. Or you can google "1099-C" and "insolvent."

Your comment would have merit if the 1099 was issued for debt forgiveness.

This thread concerns the taxation of proceeds from a lawsuit.

If you recover monies from a collection agency or even the original creditor, those amounts are taxable to you irregardless if you are solvent or not.

Technically, if you prevail in a lawsuit in which as part of the settlement you receive no money, but the debt is forgiven, then you would not receive a 1099-C. You would receive a 1099-Misc and you would pay taxes on the forgiven amount.

The IRS is doing a lot of income matching computations. Last year from what I understand those computations were run in September. If you wanted to try and "beat" the system, you would have filed for an extension and then filed your taxes at the last minute in the hopes of not getting caught.

If the award is large enough and the discrepancy large enough to raise a flag, it is only a matter of time before you get a letter from the IRS.

Its not illegal to avoid paying or paying the minimum tax possible, but it is illegal to evade the paying of taxes owed.

[Hedwig]

Originally Posted by Enigma

Its not illegal to avoid paying or paying the minimum tax possible, but it is illegal to evade the paying of taxes owed.

This is what I have told so many people. It is not illegal to avoid taxes, only to evade them.

You are also right about the income-matching. Except I think in September they run not the current filing year, but the previous. So the trick wouldn't work unless you filed more than a year late.

In 2004 I rolled an IRA into my company's 401(k) plan. The directions said don't send any paperwork, just write "rollover" next to it. I did so. Last September (a year and a few months past filing deadline), I got a certified letter from the IRS that they were assessing tax and penalties (and interest, of course) on this "income." I called them and told them it was a rollover, and they told me to submit a letter or some paperwork that my company's plan accepted it as a rollover. I got the letter, sent it in, and all was OK. It was a sizable amount, though.

[suedinaz]

one 1099-C since the settlement agreement states the debt will be forgiven, and one 1099 misc from the monetary settlement I will receive from the jdb/their attorney. Can I just wait til I file my taxes for 2007 (next year) and pay up then if I owe, or does it have to be done once I recieve it? I have reason to believe, unless these amounts are taxed in a different fashion than other income, that I will still owe nothing (I hope) as I have been able to claim "exempt" from taxes for several years now due to very low income. I have been getting the EIC yearly due to my lower income, head of household status, and having 2 kids. My earned income this year is also projected to be very low (less than $500/mo). I am thinking I will still put aside some of it just in case I do end up owing and use it for an emergency fund if I don't. Any thoughts or comments? Thanks again for all the help!

[Enigma]

Originally Posted by suedinaz

one 1099-C since the settlement agreement states the debt will be forgiven, and one 1099 misc from the monetary settlement I will receive from the jdb/their attorney. Can I just wait til I file my taxes for 2007 (next year) and pay up then if I owe, or does it have to be done once I recieve it? I have reason to believe, unless these amounts are taxed in a different fashion than other income, that I will still owe nothing (I hope) as I have been able to claim "exempt" from taxes for several years now due to very low income. I have been getting the EIC yearly due to my lower income, head of household status, and having 2 kids. My earned income this year is also projected to be very low (less than $500/mo). I am thinking I will still put aside some of it just in case I do end up owing and use it for an emergency fund if I don't. Any thoughts or comments? Thanks again for all the help!

What will the amount be for the 1099-C and for the settlement can you give a ball park figure?

In not set aside 15% of both the 1099-C and the 1099-Misc in an account that you won't touch.

Or if you fell better take the 15% and send it in using a 2007 voucher.

[Hedwig]

If you have to pay estimated taxes, don't they look at when the money was received against when the taxes were paid?

I know that when I had a part-time business I upped my withholding at my regular job so that all my taxes were paid in withholding, since withholding was considered to be paid equally through the year, even if I had them take it all in the last month.

Since this would be the first year for taxes, do they make an exception, or is that one of the things I haven't kept up with?