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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 10144
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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Story short. An Investment Co had my trust(thought handled

Customer Question

Long story short. An Investment Co had my trust(thought handled properly, but wasnt put in the Student 529 or a trust. I just recently received a small settlement from them but my lawyer is not a tax specialist. If this was originally an inheritance and I received a settlement(I know my lawyer will have to claim his portion he received) but will I have to have it like income or is there some special way this can be handled so I won't owe tax. It is a very sad day if I have to pay taxes. My lawyer said that the invest company wouldn't be filing a 1099 but I just wasn't sure what to do.
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.

Hi,

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I hold J.D. (Duris Doctorate -a Doctoral degree in the law), MBA (Finance & Tax specialization), a BBA from Mercer University's Stetson School of Business & Economics, as well as CFP and CRPS (Chartered Retirement Plans Specialist) designations

I can help here

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Your attorney is correct. If this was simply indenmification (making you whole) for a loss created by the respondents, then (as long as you haven't already taken a tax loss) this will not be taxable.

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Now, if there were punitive damages, or some amount that created a net INCREASE in wealth (as the IRS would call it) or any other action that awarded you what would essentially be a profit (more than what you would have had if things were handled properly) then THAT portion of the settlement might be taxable.

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Please let me know if you have questions

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Lane

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Customer: replied 1 year ago.
Just so I understand. Since this settlement was not more than I originally would've inherited but is much less, then it is not taxable. Is there a name for this action?
Expert:  Lane replied 1 year ago.

That's right.

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Sorry, the tax code doesn't really say what's not taxable (except in those cases where things are made non-taxable througth legislateive grace - such as IRC §102 which says specifically that inheritances, bequests, and gifts are not subject to income tax)

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What the tax code does is define what IS income and then delineate SOME exceptions, that one would THINK might be taxable because it DOES represent a net increase in wealth.

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Here, we simply have a case where there is no enrichment, no net increase in wealth. You are being made whole because of an economic loss created by the investment company.

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Expert:  Lane replied 1 year ago.

The fact that in a settlement the award retains it's character AND the fact that inheritance is not taxable (again §102) is what's at work here.

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For example, in lost income cases where back pay is awarded, those settlements ARE taxable, becasue the incom (had it been received) would have been taxable

Expert:  Lane replied 1 year ago.

If you'd like a way to analyze this AGAINST the tax code, it is best done by showing that it is not one of the types of damages are taxable

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See this list from IRS, Publication 525 (and note the statement that "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.")

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"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. The character of the income as ordinary income or capital gain depends on the nature of the underlying claim. Include the following as ordinary income.

  1. Interest on any award.

  2. Compensation for lost wages or lost profits in most cases.

  3. Punitive damages, in most cases. It does not matter if they relate to a physical injury or physical sickness.

  4. Amounts received in settlement of pension rights (if you did not contribute to the plan).

  5. Damages for:

    1. Patent or copyright infringement,

    2. Breach of contract, or

    3. Interference with business operations.

  6. Back pay and damages for emotional distress received to satisfy a claim under Title VII of the Civil Rights Act of 1964.

  7. Attorney fees and costs (including contingent fees) where the underlying recovery is included in gross income.

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Note that each of these represent something that would HAVE been taxed if received ... meaning, then, that when awarded as damages, they are taxable

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Then take note of IRS §102, which says that inheritances, gifts and bequests are NOT taxable

Expert:  Lane replied 1 year ago.

I hope this helps to clarify

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If this HAS helped, and you If you don't have additional questions on this, I'd appreciate a positive rating (by clicking the stars on your screen) ... that's the only way I'll be credited with a portion of what you've paid JustAnswer.
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Lane

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Expert:  Lane replied 1 year ago.

Still with me?

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OK, I still don't see you coming back into the chat here

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Again, to recap, this award is compensatory in nature ... Compensatory awards are taxed based on what the award was meant to replace.

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Here, we are talking about an indemnification of amounts lost from inheritance. Inheritance is not taxable (26 US §102)

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Further this is not delineated in the code as taxable.

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This is not taxable, and the reason, at least one of the reasons, that you will not be receiving a 1099.

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Hope this helps to clarify

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I hope you'll rate me positively, using the stars on your screen … (that's the only way we get credit for the work here) … based on thoroughness and accuracy.

Expert:  Lane replied 1 year ago.

Hi,

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I'm just checking back in to see if you saw my answer.

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Let me know if this helped.

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Let me know if you need more here too.

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If you don't have any other questions on this, I'd really appreciate a positive rating (using those stars on your screen) … That's the only way I'll be credited with a portion of what you've paid JustAnswer.com

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Thank you,

Lane

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Expert:  Lane replied 12 months ago.

Hi,

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I'm just checking back in to see how things are going.

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Did my answer help?

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Please let me know if you need more here

And if not, I'd appreciate a positive rating (using the stars on your screen). That's the only way JustAnswer will credit me with a portion of what you've paid them.

Thank you,

Lane

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Expert:  Lane replied 12 months ago.

Did you see my answer?