Sexual Harassment: Paying Taxes On A Law Suit Settlement
In 2004 I finally received a settlement for a wrongful termination in 2001. I was terminated for complaining about a person who was physically hurting me and making lude comments. The company finally paid me, 1/2 went to the lawyer, and then sent a 1099. I didn’t claim it on my income tax, and now the IRS is billing me for almost the entire amount I actually received. My lawyer at the time said it was not taxable because it was for mental anguish. What can I do?
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3 Responses to Sexual Harassment: Paying Taxes On A Law Suit Settlement
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On a high level, it works like this. If you get paid money because you CAN’T work, such as with disability, it is not taxable. If you get paid money for a period that you were physcially ABLE to work, it’s taxable. Example: Unemployment is taxable because you can only get unemployment if you are ready, willing and able to go back to work. It’s considered income replacement, even though it only covers a spec of what you were earning.
I’m pretty sure you do. Here’s an article that sums it up:
http://www.ssd.com/publications/pub_detail.aspx?pubid=9195
One quote highlighted there: "Under this rule, damages for pain and suffering, emotional distress, and punitive or exemplary damages are taxable."
However, you may be able to deduct the attorney fees – the cut your lawyer took from your settlement. If that hasn’t already been taken into account you might walk away with a little money.
Your lawyer gave you some bad advice. The IRS considers all awards taxable unless they involve compensation for a physical injury or illness.