Legal Question in Disability Law in California
do I have to pay taxes on a settlement?
I have have decided to accept the other party's settlement offer in order not to go forward with my housing discrimination law suit. It will be a confidentiality agreement in place and the amount of the settlement will not be able to be disclosed.
My question is: Do I have to pay taxes on the money that i will get as a result of the settlement? Will the other party send me a tax form next year? Or, how it works?
1 Answer from Attorneys
Re: do I have to pay taxes on a settlement?
You have to pay taxes on that portion of the settlement that represents damages you suffered that would be taxable normally. So if you lost $10,000 in wages because you could not work, if the settlement pays you $8,000 for lost wages, you have to pay icome taxes on $8,000 if you are a "cash" basis taxpayer. Injuries to your body, however, are not taxable as that is not a replacement for ordinary income.
The government normally does not pay much attention to settlements. If no one reports the settlement to the IRS, they normally do not pay any attention to settlemenets. The terms of the settlement can be modified before signing it to allow for some portion to go to a taxable event and the rest not, and no one will likely pick it up.
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