In a settlement case, the attorney did not disclose to the client that the client is responsible for taxes on the whole lump sum of the settlement. No documentation was given to the client that reflected that fact. Additionally, it was not in the settlement agreement or on the receipt. Only the total award minus all taxes was reflected on the receipt. Leaving the client to figure out why they were taxed 51%.
I suggest talking with your attorney about this. Non-tax attorneys often are not really aware of the tax implications of their settlements, but this attorney obviously had some knowledge of it as he or she actually withheld the taxes. If the settlement was for wages, such as in a wrongful termination case, the taxes are withheld as they would be on payment of actual wages and are reported on a Form W-2 just as if you had earned them while working. However, you would need to discuss the actual explanation in your case with your attorney. If you do not receive a satisfactory response, you can consult with a tax attorney based on your exact circumstances, as they will need to review details about the settlement itself to determine proper tax treatment and withholding requirements.
Please note this information is general in nature and based solely on the information you have provided. This does not constitute specific legal advice.
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