| If you sue someone and win, do you claim your winnings? | Top |
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. Include the following as ordinary income.
1. Interest on any award.
2. Compensation for lost wages or lost profits in most cases.
3. Punitive damages. It does not matter if they relate to a physical injury or physical sickness.
4. Amounts received in settlement of pension rights (if you did not contribute to the plan).
5. Damages for:
a. Patent or copyright infringement,
b. Breach of contract, or
c. Interference with business operations.
6. Back pay and damages for emotional distress received to satisfy a claim under Title VII of the Civil Rights Act of 1964.
7. Attorney fees and costs 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: 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. Do not include them in your income. If the emotional distress is due to a personal injury that is not due to a physical injury or sickness (for example, unlawful discrimination or injury to reputation), you must include the damages in your income, except for any damages you receive for medical care due to that emotional distress. Emotional distress includes physical symptoms that result from emotional distress, such as headaches, insomnia, and stomach disorders.
Deduction for costs involved in unlawful discrimination suits: Beginning after October 22, 2004, you may be able to deduct attorney fees and court costs paid to recover a judgment or settlement for a claim of unlawful discrimination under various provisions of federal, state, and local law listed in Internal Revenue Code section 62(e), a claim against the United States government, or a claim under section 1862(b)(3)(A) of the Social Security Act. You can claim this deduction as an adjustment to income on Form 1040, line 35. The following rules apply.
1. The attorney fees and court costs may be paid by you or on your behalf in connection with the claim for unlawful discrimination, the claim against the United States government, or the claim under section 1862 (b)(3)(A) of the Social Security Act.
2. The deduction you are claiming cannot be more than the amount of the judgment or settlement you are including in income for the tax year.
3. You must pay the attorney fees and costs after October 22, 2004.
4. The judgment or settlement to which your attorney fees and court costs apply must occur after October 22, 2004.
Pre-existing agreement: If you receive damages under a written binding agreement,
court decree, or mediation award that was in effect (or issued on or before) September 13, 1995, do not include in income any of those damages received on account of personal injuries or sickness. |
| I received a lump sum distribution for 49.94, No Federal tax was withheld. Do I need to report this on my return? | Top |
Yes, Form 4972 is used to report and figure tax on Lump-Sum Distributions
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| I was injured on the job this year. I received worker’s compensation for several months, as I was not able to work. Where do I report this income on my tax return? | Top |
| Worker’s compensation for an occupational sickness or injury if paid under a worker’s compensation act or similar law is not taxable. You do not need to report this income on your tax return. |
Yes, Form 4972 is used to report and figure tax on Lump-Sum Distributions
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| What are the tax rules regarding an inheritance? | Top |
| Generally, property you receive as a gift, bequest, or inheritance is not included in your income. However, if property you receive this way later produces income such as interest, dividends, or rents, that income is taxable to you. If property is given to a trust and the income from it is paid, credited, or distributed to you, that income is also taxable to you. If the gift, bequest, or inheritance is the income from the property, that income is taxable to you. |
Yes, Form 4972 is used to report and figure tax on Lump-Sum Distributions
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| How do I know if my state refund is taxable? | Top |
| State and local income tax refunds are taxable if the refunded tax was deducted in a prior year and the taxpayer received a tax benefit from the deduction. Refunds are not taxable if the taxpayer did not itemized deductions in the prior year. Refunds are partially taxable if the taxpayer’s itemized deductions exceed the taxpayer’s standard deduction by less than the amount of the refund. Use the Worksheet to Determine Taxable Portion of State Refund to calculate the taxable portion of the refund. Check the list of special situations before using the worksheet. |
