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Im thinking of settleing a lawsuit with a Catholic order.

Customer Question
they say they will be...
Im thinking of settleing a lawsuit with a Catholic order. they say they will be responsible for the taxes. Will this income show in my irs record for the settlement year
Submitted: 8 years ago.Category: Tax
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7/2/2009
Tax Professional: Ed Johnson, Tax Preparer replied 8 years ago
Ed Johnson
Ed Johnson, Tax Preparer
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DearCustomer

 

This depends on the nature of the settlement.

 

For example, settlements and judgments for personal injury are non-taxable, and there for non-reportable.

 

The taxing of settlements generally follows the rules for what was compensated for or replaced.

 

Apparently the order believes this to be a taxable settlement, because they said they would pay the taxes for you. If that is the case, then there would be a 1099 issued to the IRS and you at the end of the year; so in this case it is reported.

 

In addition, if they pay the taxes for you, then the money they pay for tax, is also income on which you have to pay taxes. If they intend to make you perfectly whole for taxes, then they have to pay about 71 to 77 cents on the dollar over and above what the settlement is.

 

This is called grossing up. Each time they pay taxes for you, that money becomes taxable, and so forth until you reach a point, that all taxes have been paid.

Ed Johnson
Ed Johnson, Tax Preparer
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Customer reply replied 8 years ago
They have agreed not to issue me a 1099 I dont know if that has any impact that there is tax to be paid or not. I was audited for the year of the settelment because of an investment that was nor reported properly. Then they asked where the money in my bank acount came from.
Tax Professional: Ed Johnson, Tax Preparer replied 8 years ago

DearCustomer

 

They may be required to issue a 1099.

 

What does the money replace? If the money replaces propety on which you had to pay capital gains, for property that was sold, then you have to add it to the price you received and you may be exposed to capital gains. (for example)

 

If they did not report it on a 1099, you would still be obligated to report it on your return.

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