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Weary Traveler

TCPA Statutory Damages - Taxable ?

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Hello All,

 

Just a question:  Are settlements or awards obtained from a TCPA case taxable?  The information I've searched online doesn't address it specifically, however, I have found some articles that indicate that damages that aren't physical are indeed considered revenue.

 

Lets say for sake of discussion that the settlement is for $100,000.  Mr Diligent Attorney takes his 33% slice of the award.   As the Plaintiff are you taxed on the entire $100,000?  Or just the $66,500 that ends up being your share of the award? 

 

I never thought I'd be in a position to be pondering this type of issue! ::idea2:: I did have a coworker who also owns a business give me a valuable piece of advice.  If you ever end up in this type of situation and you're at the beginning of a tax year, be sure to pay the IRS within the quarter that the settlement occurs.  I guess if you wait until the end of the year you would likely be penalized for underpayment.

 

Just curious if anyone has had this experience before.  I must say that I'm enjoying being on the this side of the coin and sticking it to these assclowns.   XFryingPanX

 

Thanks in advance,

 

W.T.

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You have presented 2 issues here.

The first issue is the tax issue. Generally, anything above and beyond actual damages is taxable in regards to physical injury or damage to person or property. This includes pension rights if you did not contribute, lost wages or profits where you have not paid taxes on the income yet, punitive damages that are beyond actual damages, copyright infringement, back pay for discrimination, and attorney fees. Emotional Distress which you can prove an actual underlying condition is considered part of actual damages. You also must recapture any actual damages that you took a deduction on in a prior year (such as medical payments that you deducted).

To figure out what your income from the settlement is, you take the settle, subtract out any actual damages, and add back in any damages you deducted in a prior year. You can ask your attorney to itemize what was what in the settlement

Now, you can deduct the legal expenses as an Other Itemized Deduction which is subject to the 2% limit. This means that in this case, the first $2000 of the legal expense is taxable and the other $31500 is deductible. This means that if there was no actual damages in the award, the taxable income would be $68500.

Now as for estimated taxes, you should pay estimated taxes on the income in the quarter that it was received. However, for one time things, there is a safe haven where if you pay 90% of the current years tax or 100% of the previous years tax (110% if AGI is over $150,000), then you will not have an underpayment penalty. I would have simply paid the estimated tax but it might not be necessary.

Please note, most information is from Publication 17 for 2012. Tax laws may have changed and I am not a tax advisor. If you need real tax advice, please contact a tax professional.

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My tax preparer told me that they are taxable, and they tax the whole amount...including what the attorney's cut was. This came up last year for me, when I had a sizable settlement.

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Congratulations on your settlement first off!

 

Keep in mind that accountants are in the CYA business and quite anal retentive and the IRS is a pain in the same place. I have been in the same predicament many times business wise for various types of income. You are fortunate that this is pretty much the end of the tax year and you can lump this in your regular income tax filing. Yes, you will have to report the whole amount of/or  what ever the check amount was because that's what your will receive a 1099 for. You can deduct the attorney fee's (parasite share) as a direct expense however don't do it in schedule "A". You will want to deduct the total amount received by the attorney. Maybe your same accountant can advise you on that also. Many attorneys have a considerable amount of training in tax preparation - ask you attorney to advise you as part of his included payoff!!

 

Once you start filing quarterly income reports the IRS will hound you and audit you forever.  (No big deal if you are presently filing quarterly tax reports) You will have to file zero income in these reports for the rest of your life, so it seems, or you will be charged penalties for not filing quarterlies. (That's Government for you).  My suggestion would be to file your taxes early (right after the 1st of the year) and take the hit and save the future frustration with the IRS. 

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If you get a settlement that size, it's worth it to to pay a CPA/EA to ensure that all tax angles are covered. 

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simple answer YES

 

You know the IRS is not going to let a person get by with making some extra money and not pay their illegal taxes on it.

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