Is an insurance settlement considered taxable income?

Is an insurance settlement considered taxable income?

Wife was in an auto accident. Our attorney negotiated a small settlement with the insurance company. IRS claims we owe tax on the settlement because our attorney reported the settlement amount as nonemplyoyee compensation paid to us. I thought insurance settlements were nontaxabel income. Need help or the proper publication in the tax code to cite when I respond to the IRS. Thanks

misslabeled

The taxable portion is what was paid to your above and beyond "making you whole." So amounts that cover the repair of the vehicle and medical costs is not taxable and it is replacing your loss. Anything for "pain and suffering" is taxable since it doesn't represent something tangible.

Mollywobbles

I think it is but you would do better to ask a CPA.

Triguea

Go to irs.gov.comThen go to Tax Help Government InformationThen go to forms and instructions on the left hand side.You will go to 1099-MISCIt will tell you what should be reported and what should not.Maybe your attorneys accountant made a mistake because indeed she did not receive this money for services rendered. This way you pay taxes and social security. If they put it down as other income you would only pay taxes.

Lisa

We were in an accident last year and were told it was taxable income by our CPA.

ecomliquidatorssbcglobalnet

It is taxable, especially burdensome if it a lumpsum, becuause you pay the tax on the entire amount of the settlement even though your lawyer got anywhere from 25-50% of the money.You may be able to average it out over a few years though, but I am unsure the procedure.There must be some kind of way to get around this by , I don't know setting up some sort of charitable foundation devoted to helping accident victims fight big insurance companies. Have the insurance make it to that foundation (that you have created), advertise that your foundation helps accident victims fight big insurance companies, and keep at least 60-70% money in there for that use if needed, turn the leads over to your attorney and have a percentage of funds paid to you as finder fee and portion donated back into the fund ) Seems to me everybody gets a tax-write off of some sort, since you would actually be receiving a payment. Make the insurance company pays the foundation but does so on your behalf (so you get a charitable deduction, not them, after all you had to fight them tooth and nail to get what you got.) And if they refuse tell them you'll go to the press and sing like a canary about their back office strongarm tactics, and they'll pony up.Source(s):Just look at those funds that were created on your local television whenever someone dies tragically, or in unexpected circumstances, and they flash a number on the screen. Attorneys set these things up all the time, and the money collected often, as expected is way more than the actual use needed at the time, mainly the burial and related costs (which usually total Josh

When you consider yourself, think of yourself as capital. You won yourself right, you are a long term asset of yourself right? Alright, settled! Now, there is a concept in tax called capital recovery, and this applies to human beings as capital. You are allowed to recover lost capital before being taxed. THEREFORE, if your settlement is a result of injuries, and the money was meant to recover medical costs, and pain and suffering, then it is 100% NOT taxable. If, however, any of your insurance settlement was ordered as punitive damages, (if you took it to court), then punitive damages are 100% TAXABLE. If it's in result of an injury, you don't even report the money on the tax forms. If it's punitive you must report all of it though. I hope this clears things up for you, any other questions feel free to contact me!Source(s):College student with major in accounting

0-20K. These fund sometimes garner several hundred thousand, and even after paying the school costs for the surviving children, with prudent managing, these funds, often with the knowledge or consent of the original grieving family members, have grown to sizable estates, but after payment for the education for the children, and some god- awful small monthly annuity for the surviving wife, the funds life ceases and decists. Funds, remaining, if any, after (list incredibly long line of items) will be paid to surviving family members) which usually is zeroed out. Leaving sometimes millions for these bloodthirsty attorneys. As to a specific case, I am legally bound not to share this, but suffice it to say, it is not new, and is one of the best kept secrets going.

SuzeY

Bottom line: unless there's physical injury involved, it's taxable. So, if this settlement is basically punitive damages (pain and suffering), the gross amount of the settlement is taxable on page 1 of Form 1040, and any legal fees deducted from the settlement are reported on Schedule A (Miscellaneous Itemized Deductions). Also, your attorney messed up by listing the settlement in Box 7 of the Form 1099. I believe it should have gone into Box 3.Source(s):cpa

Josh

When you consider yourself, think of yourself as capital. You won yourself right, you are a long term asset of yourself right? Alright, settled! Now, there is a concept in tax called capital recovery, and this applies to human beings as capital. You are allowed to recover lost capital before being taxed. THEREFORE, if your settlement is a result of injuries, and the money was meant to recover medical costs, and pain and suffering, then it is 100% NOT taxable. If, however, any of your insurance settlement was ordered as punitive damages, (if you took it to court), then punitive damages are 100% TAXABLE. If it's in result of an injury, you don't even report the money on the tax forms. If it's punitive you must report all of it though. I hope this clears things up for you, any other questions feel free to contact me!Source(s):College student with major in accounting

Friendly

Typically, an accident settlement resolves two types of claims: 1) damage to property and 2) personal injury. If any portion of your settlement paid for repairs to your car or reimbursed an auto insurance deductible, it is not considered income. It's a "return of capital" that restores you to your position prior to the accident.The personal injury portion of your settlement is likely not income as well. In general, damage awards are considered income by the IRS. However, Section 104(a)(2) of the federal tax code specifically excludes damages from personal injuries from taxable income. The only part that would be taxable any portion of your personal injury settlement that relates to punitive damages. Since your settlement is small, I'm guessing that isn't an issue for you.If your attorney reported the amount to the IRS as compensation to you, then he/she probably deducted the same amount on his/her own taxes as compensation expense. Consider whether you want to file a complaint with your state bar association. At the very least, your attorney should fix his/her own mistake for you at no additional cost.

rockEsquirrel

To extent it is Compensation for actual damage or actual losses, then not taxable. However, if it is Punitive or Exemplary award, then it is taxable. There must be an allocation between actual damages compensated, compared to "pain and suffering" or "lost wages".

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