Since 8% was allocated to a W-2 for lost wages and 92% was given for "emotional injuries, personal injuried and related compensatory damages" on a 1099, is it all taxable income? In other words, the settlement does not address the physical battery I sustained, but I agreed to it because my lawyers thought it was the best they could ever get. So now it is tax time and I have some professionals who think the 92% is non-taxable because the original claim did include battery.
I've shared your question with the tax law forum, where your question may be seen by more attorneys who practice in this area of the law.
That said, I cannot imagine anyone providing tax information on the basis of such scant information. A tax professional needs to assess the claims and the settlement documents. It would be incompetent and malpractice to base an opinion on a summary of the allocation.
*** All legal actions have time limits, called statutes of limitation. If you miss the deadline for filing your claim, you will lose the opportunity to pursue your case. Please consult with an experienced employment attorney as soon as possible to better preserve your rights. *** Marilynn Mika Spencer provides information on Avvo as a service to the public, primarily when general information may be of assistance. Avvo is not an appropriate forum for an in-depth response or a detailed analysis. These comments are for information only and should not be considered legal advice. Legal advice must pertain to specific, detailed facts. No attorney-client relationship is created based on this information exchange. *** Marilynn Mika Spencer is licensed to practice law before all state and federal courts in California, and can appear before administrative agencies throughout the country. She is eligible to represent clients in other states on a pro hac vice basis. ***
Ms. Spencer is correct, we, as employment lawyers, are not typically tax experts and are loath to provide tax advice even to our own clients. If the settlement is large enough, we will often retain an expert to help draft the language in the settlement agreement or instruct the client to confer with their own tax adviser.
The best I can offer is by saying that the general consensus among employment lawyers is that the more specifically defined the agreement is the more likely it will be accepted by the IRS. By that, I mean the specific amounts need to be allocated for each form of damage claimed. We know that, since 1996, claims for emotional damages not related to a covered personal injury are considered taxable. But this is a very dangerous area because not all personal injuries are exempt from taxes. I know of cases where clients have failed to report settlements for damages they claim to be for personal injuries and the IRS did not buy it for one reason or another. The back taxes and penalties owed turned out to be more than the entire settlement.
Like you appear to be, I would be skeptical of anyone who tells you that 92% of the settlement is non-taxable. Get a second opinion from someone who is knowledgeable in this specific area because, like lawyers, not all tax advisers are qualified if they lack experience in this area of law.
They say you get what you pay for, and this response is free, so take it for what it is worth. This is my opinion based on very limited information. My opinion should not be taken as legal advice. For true advice, we would require a confidential consultation where I would ask you questions and get your complete story. This is a public forum, so remember, nothing here is confidential. Nor am I your attorney. I do not know who you are and you have not hired me to provide any legal service. To do so would require us to meet and sign written retainer agreement. My responses are intended for general information only.
Is the 1099 made out to you?
The communication above is provided for informational purposes only. It is not legal advise and does not create an attorney client relationship with anyone. Please consider the information above and get competent legal advise from your trusted advisor.
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