Taxes on Lawsuit Settlements
Lawsuits and settlements have become a common occurrence. There is an unhappy aspect to settlements, though. It is nothing but the taxes, which you will have to commit to the authorities. The fact that you cannot escape from the clutches of the IRS, and the state revenue department adds to the misery.
It is a fact that not all lawsuit settlements are taxable. However, most of you will not be having any notions about how to avoid paying taxes, especially when we get to access huge settlement amounts. People have this uncanny habit of not doing their homework before filing for lawsuits. In due course of time, they will end up losing a significant portion of the tax amount as taxes! The prime purpose of this brief section is to examine the niche.
Although the situation might appear to be slightly vexing, the reality lies somewhere else. With the appropriate knowledge, anyone will be able to skip paying huge tax amounts from their lawsuit settlements. Please bear in mind that it is not my intention to promote unworthy practices. Yet, we cannot ignore the legal loopholes that present themselves.
At the point, I would like to introduce the readers to tax attorneys and lawyers. It is imperative that you must employ the services of these eminent personalities during the trial. They have ample expertise in the domain and hence, they will be able to give valuable advice concerning the earlier mentioned “loopholes”.
Sometimes the tax law can vary across borders. In certain states, the percentage of the tax amount (that you must part with in case you own a settlement) is slightly lower than the other states. However, we have to be extremely lucky to reside in such places (in order to access the vantages). Anyway, as a rule of thumb, most of the states do not charge taxes on settlement amounts that the claimant obtains as medical compensation. In other words, the type of damages incurred to the plaintiff plays a considerable role in determining whether they will have to pay taxes.
If at all you are required to pay taxes, a good online tax calculator will come handy. Needless to state but various kinds of software tools that do the exact same thing is already available at your disposal. If you are not smart, you might end up paying a lot more by the name of taxes. Imagine giving away $350,000 as tax for a $1,000,000 lawsuit settlement amount. Some might argue that the tax amount is completely worth it.
One of the best (and most sought after) methods to escape from the wrath of the IRS is to opt for annuity payments for the lawsuit settlement. The paradigm is self-explanatory. For the sake of illustration, we will take into account the earlier mentioned $1,000,000 - when paid yearly over a period of ten years. The taxes for the entire amount might be huge. However, since you are getting it as yearly payments, you will have to give away nominal sums only as the tax amount.