Settlement Planning for Taxable Damage Cases
While settlement planning is useful for IRC Sec. 104(a)(2) cases (i.e. those involving a personal injury) it is even more important when dealing with taxable damage cases including claims involving:
- Discrimination
- Bad faith
- Wrongful termination
- False imprisonment
- Construction defects
- Breach of contract
- …etc.
If you anticipate receiving settlement proceeds from a case not involving personal physical injury, your settlement will likely be fully taxable in the year of settlement, and could push you into the highest tax bracket.
As if that thought isn’t depressing enough, consider this…
The Supreme Court decision in the Banks & Banaitis v. Commissioner cases held that “as a general rule, when a litigant’s recovery constitutes income, the litigant’s income includes the portion of the recovery paid to the attorney as a contingent fee.”
What this means to you as a plaintiff receiving a taxable damage settlement is that you must report the gross amount of the settlement as income, and then deduct the attorney’s fee “below the line.”
This often subjects you to the 2% floor on itemized deductions, and will likely phase-out your allowable deductions and can even trigger the Alternative Minimum Tax (AMT): a “perfect storm” of a tax nightmare.
How Can You Avoid This Tax Hit?
A qualified Settlement Planner can help you:
- Defer the tax hit
- Guarantee your future income
- Avoid what could be an ugly, nasty tax mess.
Some simple planning “BEFORE the proceeds of the settlement have been negotiated and paid“, can often eliminate the AMT entirely and help save you a bundle in taxes.
What Is Your First Step?
As a plaintiff in a taxable damage case involving:
- Discrimination
- Bad faith
- Wrongful termination
- False imprisonment
- Construction defects
- Breach of contract
- …etc.
… your first step is to contact a qualified settlement planner to go over your options. Our approach at Settlement Professionals Inc. is to look at your overall goals and needs, and help you craft a settlement plan that helps you reach your goals and needs one by one.
Remember, there are no fees to you for our settlement planning services, so you have nothing to lose if you call… but potentially a lot to lose if you do not have a rock solid settlement plan to help you reach your goals.
Contact us now to discuss your case and to determine whether some simple settlement planning will help your situation.
