Court settlement in 2007 from case filed in 2005-06. Which year to recognize the income?

  • Thread starter TheUsenetReader
  • Start date

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TheUsenetReader

I am expecting a settlement inn 2007 for wrongful termination case
(based on age discrimination).

The termination occured in November 2004. The case was filed with the
federal fair employment agency in 2005 and then with the CA state
court in 2006 (as per federal law, the federal agency had to complete
their investigation before allowing me to file the case in CA state
court). .

Question:
In which year will the income be recognized? Do I have a choice in
selecting the year?


As a result of the termination, I fell into severe depression and was
prescribed medication by my doctor and lost my insurance coverage, but
it is taxable income according to the article below:


http://articles.moneycentral.msn.com/Taxes/AvoidAnAudit/WinInCourtWithoutLosingToTheIRS.aspx

"
The big rule change on personal injuries is this: Unless the injury is
physical, any settlement or award is taxable. That makes awards for
discrimination, emotional distress and/or injury fully taxable -- even
though these awards are intended only to make you whole again.

For a verdict or settlement to be tax-free, it must be structured to
meet two new code requirements:

A physical injury or illness must have occurred. Without either, the
proceeds will clearly be taxable.

The injury or illness must be the result of a tort -- a wrongful act,
injury or action. If you successfully sue someone who hit your car,
the award will be tax-free. But if you win a back pay judgment from a
breach of contract suit, the award is taxable income. It resulted from
a contract dispute.

What appears simple and straightforward ain't necessarily so. Here's
where creative planning and litigation can save substantial dollars.

Planning a settlement
Let's look at emotional distress. Emotional distress can produce
physical symptoms -- headaches, stomach pains, insomnia and the like.
As a result, you may believe that any award or settlement for
emotional distress might not be taxable. Sorry. Emotional suffering,
no matter how bad the headaches, doesn't come free of a tax bill.

But let's say you're suing for sexual discrimination, and you were
subject to unwanted touching and suffered bruises. This changes the
situation. With pictures and a doctor's testimony about the injury,
significant damages could be allocated to the "physical" injury, and
these damages would be beyond the reach of the Internal Revenue
Service.
"
Question:
So there is now way I can structure the settlement to include damages
for "physical injury"?

3. I plan to deduct attorney fees and court filing fees as per the
"American Jobs Creation Act of 2004"

http://www.irs.gov/newsroom/article/0,,id=130215,00.html

"
Deduction for Discrimination Suit Costs - A new deduction is available
for those who pay attorney's fees and court costs in connection with
discrimination suits. Taxpayers can take the new deduction whether
they itemize or not. The deduction cannot exceed the amount includible
in income for the year on account of a judgment or settlement
resulting from the discrimination claim. Generally, personal legal
expenses are not deductible, but an employee who incurs legal expenses
related to doing or keeping his job could deduct these expenses on
Schedule A as a miscellaneous itemized deduction. However, under The
American Jobs Creation Act of 2004, an individual with legal fees and
court costs arising from a discrimination suit may deduct the costs
directly from income on the front of the tax return; this is known as
an above-the-line deduction.

Under this new deduction, amounts paid for attorney's fees and court
costs are deductible in computing alternative minimum tax, and are not
subject to the 2 percent floor on miscellaneous itemized deductions or
the overall limitation on itemized deductions.
"

Question:
Can I also include car mileage costs for travelling to court to file
case documents?

Question:
If, for example, the settlement is for $10,000, then I would deduct
the 40% attorney fees of $4000.
But I am wondering why I need to deduct it from my income, instead of
just stating the net total ($6000)I am receiving from the settlement
and let the lawyer report the net total he is receiving.
Seems like the IRS is taxing the same amount twice; once from myself
and once from the lawyer.
 
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A

Arthur Kamlet

I am expecting a settlement inn 2007 for wrongful termination case
(based on age discrimination).

The termination occured in November 2004. The case was filed with the
federal fair employment agency in 2005 and then with the CA state
court in 2006 (as per federal law, the federal agency had to complete
their investigation before allowing me to file the case in CA state
court). .

Question:
In which year will the income be recognized? Do I have a choice in
selecting the year?



In the year in which you constructively received it. Usually that
is the year it is paid to you.
As a result of the termination, I fell into severe depression and was
prescribed medication by my doctor and lost my insurance coverage, but
it is taxable income according to the article below:


http://articles.moneycentral.msn.com/Taxes/AvoidAnAudit/WinInCourtWithoutLosingToTheIRS.aspx

"
The big rule change on personal injuries is this: Unless the injury is
physical, any settlement or award is taxable. That makes awards for
discrimination, emotional distress and/or injury fully taxable -- even
though these awards are intended only to make you whole again.

For a verdict or settlement to be tax-free, it must be structured to
meet two new code requirements:

A physical injury or illness must have occurred. Without either, the
proceeds will clearly be taxable.

The injury or illness must be the result of a tort -- a wrongful act,
injury or action. If you successfully sue someone who hit your car,
the award will be tax-free. But if you win a back pay judgment from a
breach of contract suit, the award is taxable income. It resulted from
a contract dispute.

What appears simple and straightforward ain't necessarily so. Here's
where creative planning and litigation can save substantial dollars.

Planning a settlement
Let's look at emotional distress. Emotional distress can produce
physical symptoms -- headaches, stomach pains, insomnia and the like.
As a result, you may believe that any award or settlement for
emotional distress might not be taxable. Sorry. Emotional suffering,
no matter how bad the headaches, doesn't come free of a tax bill.

But let's say you're suing for sexual discrimination, and you were
subject to unwanted touching and suffered bruises. This changes the
situation. With pictures and a doctor's testimony about the injury,
significant damages could be allocated to the "physical" injury, and
these damages would be beyond the reach of the Internal Revenue
Service.
"
Question:
So there is now way I can structure the settlement to include damages
for "physical injury"?

If you have alrady reached a settlement, I doubt you can reopen
it, but ask your attorney.

This is now a legal issue.


Otherwise follow the recent Murphy case in which the court first
ruled the Internal Revenue Code Section to be unconstitutional
and then after a wave of criticism from distinguished legal
types, reversed itself and affirmed the statute.


3. I plan to deduct attorney fees and court filing fees as per the
"American Jobs Creation Act of 2004"

http://www.irs.gov/newsroom/article/0,,id=130215,00.html

"
Deduction for Discrimination Suit Costs - A new deduction is available
for those who pay attorney's fees and court costs in connection with
discrimination suits. Taxpayers can take the new deduction whether
they itemize or not. The deduction cannot exceed the amount includible
in income for the year on account of a judgment or settlement
resulting from the discrimination claim. Generally, personal legal
expenses are not deductible, but an employee who incurs legal expenses
related to doing or keeping his job could deduct these expenses on
Schedule A as a miscellaneous itemized deduction. However, under The
American Jobs Creation Act of 2004, an individual with legal fees and
court costs arising from a discrimination suit may deduct the costs
directly from income on the front of the tax return; this is known as
an above-the-line deduction.

Under this new deduction, amounts paid for attorney's fees and court
costs are deductible in computing alternative minimum tax, and are not
subject to the 2 percent floor on miscellaneous itemized deductions or
the overall limitation on itemized deductions.
"

Question:
Can I also include car mileage costs for travelling to court to file
case documents?
That might be possible, and would certainly be an aggressive reading
of the statute. I am more conservative and would not reach that far.



I would have no problem itemizing the mileage for legal issues
as Miscellaneous 2% expenses however.

Question:
If, for example, the settlement is for $10,000, then I would deduct
the 40% attorney fees of $4000.
But I am wondering why I need to deduct it from my income, instead of
just stating the net total ($6000)I am receiving from the settlement
and let the lawyer report the net total he is receiving.
Seems like the IRS is taxing the same amount twice; once from myself
and once from the lawyer.

The rule is clear: You report the gross settlement as taxable on
Form 1040 Line 21 and then deduct it above the line as an
adjustment to income.
 

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