Is a civil settlement taxable?

[Looking4Ward]

Earlier this year I had an attorney prepare and send a demand letter to a particular auto manufacturer for "Breach of Warranty". Long story short I had given them five opportunities to repair a defect under warranty and they couldn't.

After a couple of months of furnishing facts and negotiations, I accepted a total cash settlement of $8.5K for loss of value ($3K in attorney fees and net $5.5K to me). The amount is a fuzzy calculation of the difference between what I paid for the vehicle and what I would have paid for it had I known of the defect. In effect, returning a portion of the purchase price to me.

Do you think the auto manufacturer will send me a 1099 and I will have to pay federal income taxes on all or part of this settlement?

 

[Texas Proud]

From what you say.... no, it is not taxable...

It is payment for 'damages' you sustained...

 

[Gill]

No, it is not taxable. A judgment is taxable only when the payment is in lieu of income that would be taxable. Best example is for lost wages.
Bruce

 

[Texas Proud]

No, it is not taxable. A judgment is taxable only when the payment is in lieu of income that would be taxable. Best example is for lost wages.
Bruce

I think there are other things that are taxable.... like punitive damages... which are not related to lost wages...


A good lawyer would structure the settlement so that as little as possible is taxable...

 

[Looking4Ward]

Thanks!

 

[Jerry1]

I don't know what your state tax situation is, but I'd look into a refund if you paid sales tax based on the original sales price. I have no idea if this would work, but I'd spend a few minutes trying to determine if it was. In Michigan, the sales tax is 6% so that would be $510.

 

[Looking4Ward]

I don't know what your state tax situation is, but I'd look into a refund if you paid sales tax based on the original sales price. I have no idea if this would work, but I'd spend a few minutes trying to determine if it was. In Michigan, the sales tax is 6% so that would be $510.

That did occur to me - auto sales tax is 6.25% here in TX so that would amount to $531 but they'd probably laugh me out of the county tax office if I were to pop in and ask for a refund, arguing that they have no way of knowing the total amount didn't already include a portion of the taxes paid.

 

[Texas Proud]

I don't know what your state tax situation is, but I'd look into a refund if you paid sales tax based on the original sales price. I have no idea if this would work, but I'd spend a few minutes trying to determine if it was. In Michigan, the sales tax is 6% so that would be $510.

That did occur to me - auto sales tax is 6.25% here in TX so that would amount to $531 but they'd probably laugh me out of the county tax office if I were to pop in and ask for a refund, arguing that they have no way of knowing the total amount didn't already include a portion of the taxes paid.

I would also think they would laugh you out... why Because your settlement should have taken that into account and you should have gotten it from whom you sued...

 

[Looking4Ward]

I would also think they would laugh you out... why Because your settlement should have taken that into account and you should have gotten it from whom you sued...

Exactly.

 

[Senator]

Do they give you a 1099? Can you take the check to the bank and cash it without depositing it?

That is always a great test.

 

[Looking4Ward]

Do they give you a 1099? Can you take the check to the bank and cash it without depositing it?

That is always a great test.

Don't know. Gave my attorney POA, he received the check made out to me from the auto manufacturer, subtracted his fees from the total and wrote me a check on his business account for the remainder.

 

[Senator]

Don't know. Gave my attorney POA, he received the check made out to me from the auto manufacturer, subtracted his fees from the total and wrote me a check on his business account for the remainder.

I would ask the attorney's if they are going to issue a 1099. If not, $6K of income is really a small pittance in the eyes of the IRS.

Although I do not think any civil suit income money is taxable. It is generally money to right a wrong.