Question

What are the taxes on 3 million dollars won in a lawsuit?.?

There is a lawsuit won that is 3 million dollars and the money will be divided between the children. If each child gets $400,000 dollars, would each individual have to pay their own taxes or would the tax have to be paid off the top?

7 years ago - 6 answers

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That depends upon what the lawsuit was for.

Settlements for physical injury or illness are not taxable at all. However if any portion was earmarked for lost wages, interest, punitive damages or loss of comfort & consortium, etc. than that portion is taxable as ordinary income.

Settlements that simply make you whole again are not taxed either, to the extent the the settlement covers the damages you suffered. Any amount above your actual damages is taxable as ordinary income.

Without knowing the particulars of the lawsuit and how the settlement was structured it's not possible to say how much of the proceeds, if any, are taxable.

7 years ago

Other Answers

Don't know for sure, but I'd guess off the top. The IRS would want their cut first. Taxes anywhere from 20 to 33%

by Classy Granny - 7 years ago

I don't believe that lawsuit money is taxable, at least to the person who brought the suit. Unless the court decision is to divide it between the children, it may be considered as a gift, and as such, could be taxable. Consult an tax attorney.

by cattbarf - 7 years ago

Proceeds from a law suit are not taxable unless you are recovering something with specific tax consequences.

Normally, a judgement represents damages, not income. Judgments can also represent payment for services that you purchased, such as an insurance settlement, also not taxable. (You pay insurance premiums in trade for a service--coverage. When you file a claim, you're getting the service you paid for. This is why insurance settlements can't be taxed, even if they come from a court judgment.)

You'll have to read the court judgment to see how the court arrived at the numbers and what the specific components are. The only time I've seen a lawsuit taxed is when there was an original sale, the sale went uncollected and got written off as a bad debt, and then a judgment recovered the money. In this case, the money had to be retaxed because it had been used as a deduction prematurely--a bad debt deduction. (This is called a "recapture".)

by mahal - 7 years ago

This is copied from IRS publication 17: Your Individual Income Tax.

Court awards and damages.
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.

*Interest on any award.
*Compensation for lost wages or lost profits in most cases.
*Punitive damages, in most cases. It does not matter if they relate to a physical injury or physical sickness.
*Amounts received in settlement of pension rights (if you did not contribute to the plan).
*Damages for:
Patent or copyright infringement,
Breach of contract, or
Interference with business operations.
*Back pay and damages for emotional distress received to satisfy a claim under Title VII of the Civil Rights Act of 1964.
*Attorney fees and costs (including contingent fees) 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).

by MukatA - 7 years ago

It all depends on what the settlement was for and whether it was compensatory or punitive damages.

by Donald S - 7 years ago