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I'm the plaintiff in a federal fmla lawsuit with my former…

I'm the plaintiff in...

I'm the plaintiff in a federal fmla lawsuit with my former employer and it was just announced we are going to mediation. I'm trying to understand what is the best way to structure the settlement to mitigate my tax liability

Accountant's Assistant: The Accountant will know how to help. Is there anything else the Accountant should be aware of?

The settlement will be most likely in excess of 100k

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Answered in 10 minutes by:
3/24/2018
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 32,676
Experience: Taxes, Immigration, Labor Relations
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Awards and settlements can be divided into two distinct groups. One group includes claims arising from a physical injury and the other group includes those arising from a non-physical injury. The claims from each of the two groups will usually fall into three categories:
1. Actual damages resulting from the physical or non-physical injury;
2. Emotional distress damages arising from the actual physical or non-physical injury; and
3. Punitive damages

Please be aware that compensatory damages, including lost wages, received on account of a personal physical injury are excludable from gross income with the exception of punitive damages.

So if possible - you may benefit when the larger amount is attributable to personal physical injury or sickness - as that amount is NOT reported to the IRS and is not taxable.

All other types of compensation are generally taxable.

Please refer to the following publication for details and examples

https://www.irs.gov/pub/irs-pdf/p4345.pdf

Let me know if you need any help.

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Customer reply replied 28 days ago
My lawyer told me that the distribution is usually broken into 2 parts. 1 that is taxed like payroll from my employer and the other is a 1099-misc. With no tax withheld. I do not have physical damages but the non tax portion will be "liquidated damages" under fmla. He isn't sure if that portion would have tax liability. If it does, would the 1099-misc. Portion be taxed at the same rate and is it usually subject to state tax as well. I just don't want to get hammered on taxes

Several issues to consider...

-- if there is NO compensation for personal physical injury or sickness - the rest will be taxable

-- the portion attributable to lost wages will be reported as supplemental wages on W2 form

there will be withholding for social security (up to the limit) and Medicare taxes

and 25% federal income tax withholding that will be credited toward you tax liability teh same way as withholding from regular wages.

-- the amount reported on 1099misc - be sure it is reported in box 3 and not in box 7

That amount will include attorney fees - so that should not be a surprise for you

however - you will separately deduct attorney fees and legal expenses.

I might suggest to put aside 22-24% for federal income tax liability - but that amount will be due by Apr 15 of teh following year.

your state income taxes might be extra depending where you live.

Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 32,676
Experience: Taxes, Immigration, Labor Relations
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