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PDtax, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 4512
Experience:  35 years tax experience, including four years at a Big 4 firm.
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I will be getting a 100,000 settlement breach of contract

Customer Question

I will be getting a 100,000 settlement for a breach of contract from an employer. It will come in a lump sum. They will also give me 500 a month for medical until 12/16. How do I do this without getting super hit with taxes.
Submitted: 1 year ago.
Category: Tax
Expert:  PDtax replied 1 year ago.

Hi from just answer. I'm PDtax. I can assist.

Customer: replied 1 year ago.
Hello. Where is the answer?
Expert:  PDtax replied 1 year ago.

I need more information from you first.

The breach damages are typically taxable. Can you tell me what contract was breached?

Customer: replied 1 year ago.
Five year employment contract. I signed an employment contract in July was wrongfully terminated in Jan. They have offered the settlement
Expert:  PDtax replied 1 year ago.

OK. Breach damages like this are taxable, since it relates to income, less any costs you incurred, like legal. You might also have an argument to deduct up front moving, termination costs from a prior employer you left to take the job, travel, housing commitments, etc.

Expert:  PDtax replied 1 year ago.

You are likely being offered a settlement as a wage, which will be subject to withholding. You might also ask if you get any pension benefits as a result.

You can negotiate for different tax treatment, since the offer is just that. But most of these settlements end up as wages. The employer pays the payroll taxes, too, but it's taxable to you as a wage.

Expert:  PDtax replied 1 year ago.

If you set some of the payment up as reimbursement for costs, that portion will be tax free.

Most of these settlements just take the cash as a wage and pay their taxes. You might also be able to get an unemployment benefit in addition to this settlement if it is a wage.

Thanks for asking at just answer. Positive feedback rating my assistance is appreciated. I'm PDtax.

Expert:  PDtax replied 1 year ago.

Was there anything else you needed? If this covers things, please rate my assistance to close out your inquiry. I'm PDtax.