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Sept 2008
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Taxes and You!
There was an event that caused me to file suit on an opposing party. I have been successful in the lawsuit and was awarded a settlement. Could there be a tax liability?
The following will give you information that you can make your tax liability decisions on:
Lawsuit Settlement and Awards
• All interest on awards is taxable.
• All punitive damages are taxable except in certain wrongful death actions. The taxpayer should receive Form 1099-MISC reporting any taxable punitive damages or other amounts.
Car accidents and other personal injuries - Compensatory damages received for personal physical injury are not taxable, including damages for loss of wages or earnings, loss of earning capacity, and for emotional distress caused by a physical injury or sickness. Compensatory damages are amounts paid to compensate for actual loss or injury Punitive damages are intended to punish or make an example of the defendant.
Emotional distress - Damages for emotional distress are taxable if not caused by physical injury or sickness.
Other claims - Whether a settlement or award is taxable depends on the item the settlement replaces. If the item replaced would be taxable income, the settlement or award is taxable.
Examples - taxable
- Damages for most business and contract claims (patent or copyright infringement, breach of contract, interference with business operations, etc.)
- Damages for nonphysical injuries (discrimination, defamation, libel, slander, etc.). (Murphy, D.C., Cir., July 3, 2007)
- Back pay awards and other claims against employers.
- Amounts received in settlement of pension rights if employee did not contribute to the plan. Examples - non taxable
- Class action and other settlements for consumer goods or services if amounts were not deducted in an earlier year.
- Property damages if the amount received does not exceed basis.
Life Insurance - At death - Proceeds paid because of the death of insured are not taxable unless the policy was turned over to the taxpayer for a price. Interest on proceeds held by the insurance company after death are taxable. If proceeds are paid in installments, part of each installment is taxable as interest.
Life Insurance - During life - Premiums on cash value policies that are more than the cost of insurance are invested and paid dividends, building up cash value. Policy dividends are generally not taxable unless dividends withdrawn exceed the premiums paid.
Surrender of policy for cash - Proceeds that are more than the cost of the policy are taxable. Cost is the total premium paid for the policy less any refunded premiums, rebates, dividends, or unrepaid loans that were not included in income. (Form 1099- R and reported on lines 16a and 16b, Form 1040.)
Accelerated death benefits - Amounts paid to a terminally ill insured under a life insurance contract or viatical settlement are not taxable. A physician must certify that an illness or physical condition can reasonably be expected to result in death within 24 months. Amounts paid to a chronically-ill individual for cost of qualified long-term care services are not taxable. Amounts paid on a per diem or other periodic basis may be excludable under rules for long-term care contracts. (File Form 8853 to claim an exclusion for accelerated death benefits. Form 8853 is not required for benefits paid on actual expenses.)
If you have any questions or would like to schedule a seminar/workshop, free of charge, just call (775) 852- 1416 for a time and place.