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Lev, Tax Advisor
Category: Tax
Satisfied Customers: 29573
Experience:  Taxes, Immigration, Labor Relations
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I recenty received a payment from a court settlement involving

Resolved Question:

I recenty received a payment from a court settlement involving a debt consolidation firm I had an account with (case no. 08-007686 08; Office of the Attorney General, Dept. of Legal Affairs, State of Florida vs. Laura L. Hess, ESQ, Laura Hess & Associates, P.A., Hess Kennedy Chartered LLC, and The Consumer Law Center, LLC. November 20, 2009). I live in Michigan, not Florida where the case was filed, and do not know whether or not I am obligated to pay taxes on the money I received as a result of the court case (which was under $200). Any help at all I could receive would be greatly appreciated.
Submitted: 7 years ago.
Category: Tax
Expert:  Lev replied 7 years ago.

Please see for reference IRS publication 525 -

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.

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

Do not include in your income compensatory damages for personal physical injury or physical sickness (whether received in a lump sum or installments).

Emotional distress itself is not a physical injury or physical sickness, but damages you receive for emotional distress due to a physical injury or sickness are treated as received for the physical injury or sickness.


So - to determine if any part of your settlement amount is taxable - you need to reread your settlement document and itemize your compensation.


Let me know if you need any help.


Customer: replied 7 years ago.
I'm still unsure if this answers my question. I don't actually have a settlement document since this was not MY court case specifically. What I received was an "Order on Receiver's Motion to Approve Proposed Payment Plan" document which gave the outcome of the case. I didn't personally participate in the case filing, only sent them information about my prior account and how much I paid into it. I read through the section of the document you sent me the link to, but this settlement case doesn't fit into any of the categories described under "ordinary income." So what does this mean? Do I still need to include this in my taxes for this year or not?
Expert:  Lev replied 7 years ago.

Even that was not your personal settlement - there is still exists a settlement document that was the basis of the payment you received.

That document should be obtained and examined in order to determine if all or part of the award is taxable.

Without such document it is impossible to determine if your award is taxable or not.

I believe that this is a settlement document you referenced above -

If that is correct - the settlement is about repayments of fees and funds that were paid previously by you - and as such - payments are not taxable.

You need to keep a copy of the settlement document with your tax documents and provide to your tax preparer for considerations.


Lev and other Tax Specialists are ready to help you