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Lev, Tax Advisor
Category: Tax
Satisfied Customers: 29799
Experience:  Taxes, Immigration, Labor Relations
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We will be receiving a settlement from an employment lawsuit.

Customer Question

We will be receiving a settlement from an employment lawsuit. Our pre-tax amount is $575,000.00. Since it is not a personal injury, but a discrimination case, what are my options to prevent a huge tax bill for fiscal year 2013?
Submitted: 4 years ago.
Category: Tax
Expert:  Jesse Handel replied 4 years ago.
Hello and thank you for coming to our website. We appreciate the opportunity to help you with your questions. I sincerely appreciate you requesting me for your question and I hope that I will have a chance to work with you. However, this is a complicated question that I can answer with confidence with respect to the federal tax law but, since I don't routinely deal with California state tax law, I will opt out of this question and see if a California tax expert is available to answer it. I will do some research on your question and if no California tax expert answers your question in a reasonable period of time, then I will answer it. I want to make sure that you get the very best answer possible.
Expert:  Lev replied 4 years ago.
Hi and welcome to Just Answer!
Several issues...
1. You are correct that the employment discrimination settlement is taxable as long as the award is not to compensate for the personal injury.
2. For tax purposes - income is recognized when constructively received - means if funds are available for you in 2013 - that amount is included into your taxable income on 2013 tax return. There is no magic.
So you may not prevent the tax liability but may estimate your possible tax due and with tax planning you might be able to save on taxes.
3. The full amount of compensation is taxable. That include attorney fees. However for most discrimination settlements you should be able to deduct legal expenses as adjustment to income (not as part of itemized deductions).
4. If you are still negotiating - your employer might to spread compensation over several years - that might help to avoid higher tax bracket in any single year.
5. For instance - instead of paying you directly - your employer might purchase an annuity which will provide payments to you over - for instance 10 years. Thus - each year you will receive a recognize for tax purposes a smaller amount.
6. If possible and also based on your employer - part of the settlement award might be put into qualified retirement fund - thus deferring income tax liability on that contribution.
7. If there is no choice and you still required to recognize that income - it will be subject of both - federal and CA state income taxes. Thus - if you estimate your CA taxes and pay your state tax liability before Dec 31, 2013 - you will be able to deduct that amount on schedule A thus reducing federal taxable income. However - you still need to verify if you will be subject of AMT - and if yes - you better to pay state taxes in following year.
8. In additional to the above - you may plan deductible transactions specifically in 2013 - for instance - make larger charitable contributions, prepay state real estate and property taxes, pay January mortgage bill before Dec 31, etc. If you currently have 401k plan at work - max your contribution for 2013. If you hold investments with unrealized loss - consider selling in 2013 (up to $3000 may be used to offset other taxable income). Etc.

Let me know if you need any help or clarification this matter.