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I am currently a recipient of funds due to a non-performing 1031 exchange class action lawsuit as a result of embezzlement by intermediary. These funds are being paid to me throughout the year in settlement waves. When it comes to paying my income taxes, are those funds considered taxable income and/or will I need to pay capital gains taxes? Thank you.
Country/State/Province of question: USA/New Mexico Already Tried: I have an appointment with my CPA this week. My beef is that had the IRS better regulated their program, this could well not have happened. I'm wondering if this is a battle worth fighting.
To determine if settlement amounts you receive by compromise or judgment must be included in your income, you must consider the item that the settlement replaces.
To determine if all or part of your settlement is taxable - you need to read carefully your settlement agreement and look for itemized detailed what are you awarded for.
Following are taxable items
Interest on any award.
Compensation for lost wages or lost profits in most cases.
Punitive damages, in most cases. It does not matter if they relate to a physical injury or physical sickness.
Amounts received in settlement of pension rights (if you did not contribute to the plan).
Back pay and damages for emotional distress received to satisfy a claim under Title VII of the Civil Rights Act of 1964.
Attorney fees and costs (including contingent fees) where the underlying recovery is included in gross income.
From your information - it is unclear if any part of settlement replaces a part of the sale price of an asset - if so - it might be considered a capital gain.
Please let me know if you need any help.
Tax Advisor
Taxes, Immigration, Labor Relations