If I settle a civil claim for trespass to chattels and conversion is the settlement amount subject to taxes ?
3 attorney answers
Yes, assuming no personal physical injury, the settlement is taxable, and will likely be reported on a 1099. If the claim relates to property, you may be able to offset the claim by the amount of your tax basis in the property. The gain (if any) may be capital gain.
Mr. Ornelas is correct in that the settlment will be taxable because it does not involve a physical injury. You may be able to find deductions that could at least partially offset the tax. As Mr. Ornelas pointed out, you may be able to take a deduction for attorneys fees. You may also be able to take a casualty loss if your property was stolen or damaged. There may be other possible deductions available, but you discuss this with your tax preparer.
If you are reading this, there is a good chance you might be in some tax or legal problem and you need to meet with an attorney or tax professional face to face and in person. Exchanging messages with an attorney (like myself) over a message board may not be effective in resolving whatever tax or legal problems you have. This communication is provided for informational purposes only and is not a substitute for advice provided by an attorney or licensed tax professional. This communication does not create an attorney-client relationship or any other obligation or relationship. This communication is not privileged. If you have any reason to believe you are in any sort of legal or tax trouble, you should consult with your attorney or tax professional.
The IRS looks at the "origin of the claim" (what was the underlying basis of the legal dispute) to determine (a) whether a damage award is taxable and (b) how costs associated with obtaining the award are deductible.
Damage awards arising from physical injuries are not taxable - and legal expenses associated with such awards are not deductible. Your facts don't indicate that the source of your dispute involves a physical injury, so any damage award you receive will probably be taxable - and any expenses that you incur in prosecuting your case will be deductible as miscellaneous itemized deductions on your Schedule A to your Form 1040. If your case involved property belonging to a business that was yours, then your legal expenses may be deductible as business expenses (i.e., not subject to the 2% AGI hurdle applicable to miscellaneous itemized deductions).
Anything contained in this response is for informational purposes only and neither the author nor The Ornelas Firm PLLC ("Firm") makes any representations as to the accuracy or completeness of anything contained in this response. Nothing herein shall be interpreted as legal advice from the author or the Firm, or as creating an attorney-client relationship between the solicitor and the author or the Firm. Neither the author nor the Firm will be liable for any losses, injuries, or damages from the display or use of this information. You should consult an attorney whenever confronted with a serious legal issue.
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