How to Avoid Paying Taxes on a Settlement

Taxes can be a major burden when it comes to receiving a settlement from a lawsuit. Fortunately, there are ways to reduce or even eliminate the amount of taxes you have to pay. In this article, we'll discuss how to avoid paying taxes in a lawsuit settlement for physical injury or illness. The first step is to negotiate the 1099 revenue amount before finalizing the deal.

Under the tax code, only damages that compensate you for physical injury or physical illness are tax-free. You can also request payment in the future without generating taxes before making the payment. For example, if a client verbally agrees to resolve a case in December but specifies in the settlement agreement that the money will be paid in January, then the amount is taxable in January and not December. In addition, class action settlements are taxable if there is no physical harm, discrimination, loss of income, or devaluation of an investment.

To reduce or eliminate the likelihood of having to pay taxes on a settlement, you should consider the following steps:Interview the taxpayer to determine if they provided any type of settlement payment to any of their employees (past or present). Tax exemption applies to structured agreements and payment of a lump sum for uncompensated damages in personal injury cases. Any pre-trial or post-trial interest in settlement money is taxable and may influence taxes on some attorney's fees. Awards and agreements can be divided into two distinct groups to determine whether payments are taxable or non-taxable. You may also be required to pay taxes on dividends and earned interest as soon as your settlement is received as your payment in a single lump sum and then invested in the stock market.

In general, amounts received from resolution of claims and other legal remedies may be taxable due to Section 61 of the Internal Revenue Code (IRC). Any settlement money received for emotional distress is not taxable if the distress originated from the physical injury or illness caused by the accident. By following these steps, you can reduce or even eliminate the amount of taxes you have to pay on a settlement. It's important to talk to professionals who can help you understand how to avoid paying taxes in a lawsuit settlement and keep more of the money for yourself.