Income tax liability

[octupus3503]

I am in the process of starting the legal action. My accountant knows I will have tax ramifications IF I win any money. Does anyone know if you should file an estimated tax mid-year, or if it's best to just file next year assuming I will win? (It's been said that my case is a slam/dunk......yeah sure, but better to be prepared).

Also, are legal fees tax deductible if the settlement is also taxable? If so, what forms do you need for these two things? I am assuming a 1099 for the settlement, but what about lawyer fees?

Thanks for the advice on this site that made my case appear to be a slam dunk. It will remain to be seen if it truly is.

[WhoCares1000]

First off, there is a safe haven rule when it comes to estimated/withheld taxes which states that if you paid 100% of the tax you owed the previous year or 90% of the tax you owe this year, you will not have a penalty regardless of how large your tax bill is. This means that if last year, you paid $5000 and this year, your withholdings during the year and your estimates taxes you paid is $5000 or more and because of this, you owe $1500, you will not have a penalty under the safe haven rules.

Now, if you will need to pay estimated taxes on the award for any reason, you do not pay the estimated tax until the due date AFTER you receive the award. Our tax system is pay as you do so you would only pay taxes on money actually received (since most individuals are on a cash basis anyways). If you look at form 2210, there is a section that is time consuming to fill out but can be used for those with irregular or extraordinary income.

Finally, I would think that you could deduct legal fees but I suggest you talk to a CPA in that case.

[octupus3503]

Thanks for getting back to me so quickly. I have just filed today, so it will be quite awhile till I get this far. However, I feared I'd have to take care of this in a relatively immediate manner to avoid penalties, so I wanted to ask way ahead of time in case I needed to consult someone else. This helps a great deal. I think I will just make a quick appointment with a local CPA just to be safe.

Thanks for everything. I appreciate the info.

M.K.