The civil justice system is the backbone of our social system. Whenever we are faced with a conflict with someone, we approach the court to seek relief and compensation for the damages inflicted upon us due to conflict. When you sue someone, you either win the case or receive whatever damages you claim or settle for some acceptable amount to both parties to save time and resources for both parties.
The point we are about to discuss here in this article is whether or not settlement damages are taxable in Denver, Colorado.
Are Lawsuits Or Settlement Damages Taxable in Denver, CO? Things To Consider
To fully understand the taxation of settlement damages, we need to discuss some points first.
- Under section 61, the award received against the case, irrespective of win or settlement, is fully taxable; however, the income received against the damages on account of physical sickness or personal injury is exempt from tax under section 104(a).
- Emotional stress is not exempt under section 104(a). This also includes physical sickness arising from emotional stress. In short, if the genesis of settlement for damages is emotional stress, the whole amount will be taxable. The case of Debra Barbato of US Postal Service is a good study to understand the genesis of the claim to understand the taxability of settlement claims.
- Any settlement which includes the amount against the claim for lost wages or lost profits is fully taxable. This is basically the income that you did not receive due to non-payment by the employer or the other party. It means that the amount received by you against settlement will be your lost income, which was taxable in the first place, so the settlement amount will also be taxable.
- Another interesting case is the settlement receipts for lost property. Basically, if the proceeds received against the lost property don’t exceed the adjusted current value of profit, it will not be taxable. In other words, if the amount paid by the other party doesn’t improve your financial position form before the loss of property, then the amount will not be taxable.
- Additionally, any interest on the settlement amount will also be taxable.
- The punitive damages are also fully taxable.
From the above points, one thing is clear that the tax rules with respect to lawsuit damages or settlement aren’t as straightforward as one would think. The main question behind all these rules remains the same.
The basis of the claim or the genesis of the settlement amount determines the taxability of money received.
There are prior case studies available to study to understand the rules fully.
One important thing to keep in mind before spending the amount received against tax damages is to set the tax payable aside so that you don’t have to arrange that later when the IRS contacts you to pay tax.
Another important point is that the lawyer or attorney’s fee is not deducted from the settlement amount, and the tax is calculated on the full amount. For example, if you receive $100,000 against the physical injuries, then you can do whatever you want with the whole amount. But if that $100,000 is taxable and your lawyer takes the $25,000 fee, you have to pay tax on the whole amount, and deducting the lawyer fee is not allowed.
If you are lucky enough to win a lawsuit, make sure that the settlement is not taxable, and if it is taxable, pay taxes before spending it all away.
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