Q: By the language within this settlement agreement do I have to pay taxes?
1. PAYMENT OF MONEY
In consideration for the execution of the general release and agreement to the other terms
of this Agreement by Claimant herein, Respondent will pay a Total Settlement of (xxxxxxxxxxxx) (“Settlement Sum”)
to
Claimant. The consideration paid by Respondent is specifically in exchange for Claimant’s
release of all claims. The Settlement Sum shall be paid in three separate checks as follows:
A. The first check in the amount of (xxxxxxxx) is payment for non-wage
damages, such as alleged
emotional distress and physical injury or exacerbation thereof (to which characterization the
Company makes no representation) (“Non-Wage Payment”). This amount is not a payment of
wages or substitution of wages within the meaning of §104(a)(2) of the Internal Revenue Code.
The Non-Wage Payment shall be paid by check made payable to “xxxxxxxxxxxx” and will be
reported to the Internal Revenue Service
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- Answered
A:
Based on the language provided in this settlement agreement, it appears that you will likely need to pay taxes on at least part of the settlement amount, but not necessarily on all of it. Here's a breakdown:
1. The portion described as "Non-Wage Payment" for "non-wage damages, such as alleged emotional distress and physical injury or exacerbation thereof" may be partially or fully tax-exempt under certain circumstances. The agreement specifically mentions §104(a)(2) of the Internal Revenue Code, which deals with compensation for physical injuries or physical sickness.
2. However, it's important to note that emotional distress damages are generally taxable unless they are directly attributable to a physical injury or physical sickness.
3. The agreement states that this payment "will be reported to the Internal Revenue Service," which suggests that you will receive a form (likely a 1099-MISC) reporting this income.
4. The text doesn't provide information about the other two checks mentioned, but they may be subject to different tax treatments depending on their nature (e.g., if they are for lost wages or punitive damages, they would likely be taxable).
Given the complexity of tax law surrounding settlements, and the fact that we don't have all the details of your specific situation, it would be advisable to consult with a tax professional or tax attorney. They can review the entire settlement agreement and your specific circumstances to provide accurate advice on your tax obligations.
Remember, while the settlement agreement characterizes the payment in a certain way, the IRS may view it differently. The actual taxability depends on the facts and circumstances of your case and current tax laws.
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