My husband passed away in 2018. He is part of a class action suit, and could receive $7,000 to $20,000 by the end of this year. After the lawyers take their 40%, he would be left with $4,200 to $12,000. How much income tax would he (I) have to pay on that? Is it paid on the whole amount, or just what he actually receives?
When looking at legal settlements or judgments, it is important to look at what the payments received are made up of. The payment detail can be for taxable or nontaxable items, so there are various answers to your question. I have listed a few common things that the lawsuit may have been for that hopefully covers your husband’s case.
- Physical injuries or physical sickness – Settlements for personal physical injuries or physical sickness are not taxable, assuming that the taxpayer did not take a medical expense deduction on his or her tax return for the related injury/sickness in the prior year(s).
- Emotional distress – Any payments for emotional distress that do not originate from a physical sickness or physical injury would be considered taxable.
- Punitive damages – These are taxable.
- Lost wages or profits – These would be taxable and subject to the same taxes your normal paycheck would be subject to.
- Interest – Taxable.
Prior to 2018, when considering attorneys’ fees, the amount you pay an attorney could be a tax deduction. With the new tax law, miscellaneous itemized deductions are no longer allowed to be claimed. For 2018 and forward, unless the law changes, the only time legal fees can be deducted is if the taxpayer is a business and the fees are related to taxable income.
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Answered by: Christopher R. Cicalese, CPA, MSTFP, is a manager at Alloy Silverstein Shapiro Adams Mulford Cicalese Wilson & Co. in Cherry Hill, N.J.