Legal Settlement Money Taxability

[Good_Life]

So I was fortunate to get a fairly sizable sum from a recent legal settlement in my state "Moore v Health Care Authority and State of Washington." Essentially it was meant to pay money for state employees who didn't receive any health care benefits for working part-time.

This has been a very nice and surprising windfall for my family, but also left me with the question of whether I will need to pay taxes on this. The settlement money is intended "to compensate for damages of lost health and longevity." Anyone have any ideas of whether this settlement money should be taxable or not? I have read that settlement money from suits that caused you physical harm are not taxable, but I'm unsure if this qualifies.

I'm thinking regardless I should hire an accountant this year to file my taxes to get some expert advice, but thought I would ask if anyone here has any thoughts on this. I have also never hired a tax accountant before (always just did it myself using Turbotax) so are there things I should really look out for when hiring an accountant?

 

[Meadbh]

Based on this link, I think it comes under the category of non personal injury lawsuit, and therefore would be taxed as ordinary income. But IANAL.

Tax Consequences of a Legal Settlement - Lawyers.com

 

[pb4uski]

Call the law firm or organization that ran the class action and ask them. If it is taxable, then the remitting organization should issue you a 1099-MISC or some other notification and you can enter it in TurboTax.

I would not bother to hire an accountant. The worst case is that you don't have a clear answer and don't receive a 1099 so you don't declare it and they come back after you for the tax plus interest, and I'm guessing that the interest would be less than the cost of the accountant. YMMV.

 

[Sunset]

Call the law firm or organization that ran the class action and ask them. If it is taxable, then the remitting organization should issue you a 1099-MISC or some other notification and you can enter it in TurboTax.

I would not bother to hire an accountant. The worst case is that you don't have a clear answer and don't receive a 1099 so you don't declare it and they come back after you for the tax plus interest, and I'm guessing that the interest would be less than the cost of the accountant. YMMV.

+1
Especially as some random accountant you hire, may not have had this issue before with clients, so will do the safe thing and force you to declare it, and the IRS won't tell you it's not taxable, so you will pay tax for nothing.

I once had an accountant declare something as income when it should not have been, so I stopped using him and saved over $2,000 per year for 10 years by doing the taxes myself. Turned out all the prep work I previously had to do in order to give him the information was about 90% of the total effort.

 

[Sunset]

Also OP, the firm that paid out the settlement will be sure to pass on an tax form, especially as you are not a single winner, so they are paying out to lots of State employee's.
So just like a bank with interest payments, they will mail you the form needed for taxes and if no form then not taxable.

 

[Blue Collar Guy]

they are going to issue 1099's

So I was fortunate to get a fairly sizable sum from a recent legal settlement in my state "Moore v Health Care Authority and State of Washington." Essentially it was meant to pay money for state employees who didn't receive any health care benefits for working part-time.

This has been a very nice and surprising windfall for my family, but also left me with the question of whether I will need to pay taxes on this. The settlement money is intended "to compensate for damages of lost health and longevity." Anyone have any ideas of whether this settlement money should be taxable or not? I have read that settlement money from suits that caused you physical harm are not taxable, but I'm unsure if this qualifies.

I'm thinking regardless I should hire an accountant this year to file my taxes to get some expert advice, but thought I would ask if anyone here has any thoughts on this. I have also never hired a tax accountant before (always just did it myself using Turbotax) so are there things I should really look out for when hiring an accountant?

i just read the settlement order, it says 1099's will be issued, you got to pay taxes on it. Page 3 line 4

 

[evilanne]

How much is taxable would depend on how they fill out the 1099. If part of it is reimbursement for cost you actually incurred and can document, you may be able to reduce the taxable amount. If you can't figure it out with Turbo Tax or other tax software, you may need a specialized tax lawyer/accountant to advise you on this part of your return. I'm not sure most accountants would be knowledgeable. If you use H&R Block or Turbo Tax products, I would definitely pay for the audit support in your situation

From IRS website: https://www.irs.gov/pub/irs-pdf/p4345.pdf

From Bendich, Stobaugh and Strong, P.C. "compensation is for lost health and longevity and other damages or expenses incurred by eligible class members." They reference a formula based on employment tenure. This detail may be helpful in determining what part would be considered taxable.

https://www.forbes.com/sites/robert...99-1099-are-you-outta-your-mind/#68b2ba8bf61c

https://www.law.cornell.edu/uscode/text/26/104