Comments on: How much taxes need to be paid on this (specific) lawsuit settlement? http://www.businessscope.net/8/how-much-taxes-need-to-be-paid-on-this-specific-lawsuit-settlement/ What's going on in Business in America and the rest of the world! Sun, 22 Nov 2009 23:40:17 +0000 hourly 1 http://wordpress.org/?v=3.0.1 By: bostonianinmo http://www.businessscope.net/8/how-much-taxes-need-to-be-paid-on-this-specific-lawsuit-settlement/comment-page-1/#comment-11 bostonianinmo Sat, 09 Aug 2008 22:38:42 +0000 http://www.businessscope.net/8/how-much-taxes-need-to-be-paid-on-this-specific-lawsuit-settlement/#comment-11 The wages is fully taxable. There's no way out of that. The $10k compensatory damages are ONLY tax-free if they were due to physical injury or illness. I do believe that there is now a court case that does add mental stress and anguish to the physical injury or illness criteria but don't have a ready reference on that. If the $10k in comp damages was not due to physical injury or illness (with a possible inclusion of mental anguish and stress) then IT will be fully taxable as well. The total tax will depend upon your tax bracket. The taxable portions of the award are added to your other income for the year that the award is paid. If you're already in the 25% tax bracket it will be taxed at that level at least. Some of it may well kick you up to the 28% bracket so it could be higher than your current bracket in the end. State taxes would depend upon your State tax bracket and would be in addition to the Federal tax bite. In most cases these settlements are not subject to withholding so you will have to set aside enough of the settlement to pay the taxes due. Better yet, you should make a payment using Form 1040-ES to cover the expected liability to avoid any possibility of penalties for undermayment of tax as well as to get it out of your hands so you don't spend it on something else and leave yourself hanging that way. The wages is fully taxable. There’s no way out of that.

The $10k compensatory damages are ONLY tax-free if they were due to physical injury or illness. I do believe that there is now a court case that does add mental stress and anguish to the physical injury or illness criteria but don’t have a ready reference on that. If the $10k in comp damages was not due to physical injury or illness (with a possible inclusion of mental anguish and stress) then IT will be fully taxable as well.

The total tax will depend upon your tax bracket. The taxable portions of the award are added to your other income for the year that the award is paid. If you’re already in the 25% tax bracket it will be taxed at that level at least. Some of it may well kick you up to the 28% bracket so it could be higher than your current bracket in the end.

State taxes would depend upon your State tax bracket and would be in addition to the Federal tax bite.

In most cases these settlements are not subject to withholding so you will have to set aside enough of the settlement to pay the taxes due. Better yet, you should make a payment using Form 1040-ES to cover the expected liability to avoid any possibility of penalties for undermayment of tax as well as to get it out of your hands so you don’t spend it on something else and leave yourself hanging that way.

]]> By: Mathew http://www.businessscope.net/8/how-much-taxes-need-to-be-paid-on-this-specific-lawsuit-settlement/comment-page-1/#comment-10 Mathew Fri, 08 Aug 2008 22:50:32 +0000 http://www.businessscope.net/8/how-much-taxes-need-to-be-paid-on-this-specific-lawsuit-settlement/#comment-10 The $35K is added to your ordinary income in the year that you receive the settlement. The tax rate will depend on your other income for that year. The $35K is added to your ordinary income in the year that you receive the settlement. The tax rate will depend on your other income for that year.

]]> By: PepsiLime http://www.businessscope.net/8/how-much-taxes-need-to-be-paid-on-this-specific-lawsuit-settlement/comment-page-1/#comment-9 PepsiLime Fri, 08 Aug 2008 13:59:15 +0000 http://www.businessscope.net/8/how-much-taxes-need-to-be-paid-on-this-specific-lawsuit-settlement/#comment-9 Who's paying the backpay wages? You should have filled out a W-4 so they would know how much to withhold for federal and state taxes. Social security will still be 6.2% and medicare will still be 1.45%. Who’s paying the backpay wages? You should have filled out a W-4 so they would know how much to withhold for federal and state taxes. Social security will still be 6.2% and medicare will still be 1.45%.

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