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class action lawsuit

Posted on 2014-03-19
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Last Modified: 2016-07-13
So I was involved in a class action lawsuit and won...about $30,000 and now I'm worried about how this is going to affect my taxes next year and what taxes in going to need to pay.  I also want to know how I can get away from paying these taxes, maybe opening up a IRA or contributing this into my 401k?
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Question by:uppercut71412
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by:
aadih earned 168 total points
ID: 39939795
You may pay estimated taxes as detailed in:

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Estimated-Taxes >

Also: "Form 1040-ES, Estimated Tax for Individuals" at:

http://www.irs.gov/uac/Form-1040-ES,-Estimated-Tax-for-Individuals-1 >
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by:TommySzalapski
TommySzalapski earned 166 total points
ID: 39939817
It will increase your gross income by $30,000 and will increase the tax you pay accordingly.
Additionally, you may be required to file quarterly. Pay attention in Aadih's link to the information about "When To Pay Estimated Taxes."

Your best bet would be to go to a local tax professional. They are not expensive relative to the fines you would have to pay if you guessed wrong and they know more loopholes and ways to reduce taxes than we do.

That said, anything you can do with regular income (after you get it) to reduce taxes can be done in this case. You can't do any of the pre-tax stuff though I don't think (like FSA or some of the before-tax IRA options).
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by:lherrou
lherrou earned 166 total points
ID: 39939983
uppercut71412,

I agree with Tommy, your best bet is to consult a tax professional. If you are in the USA, according to the tax code, damages due to physical injury or sickness are not taxable, but all other compensation, punitive damages, etc, generally are. (U.S. Code 26 U.S.C. § 104(a).) This document lays out the IRS guidance on settlements and awards:
http://www.irs.gov/pub/irs-utl/lawsuitesawardssettlements.pdf

You'll see it's pretty complicated.

And, certainly there are steps you can take to move some of that income into non-taxed retirement accounts, but there are limits on the amount you can do that with in a single year - again, a tax professional or financial advisor can help you with that - it's not simple.

Cheers,
LHerrou
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Author Comment

by:uppercut71412
ID: 39940358
Thanks for the information!

This was actually a lawsuit involving unpaid overtime.  Anyone have any information on this?
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Expert Comment

by:lherrou
ID: 39940426
Per the IRS document (link I posted above): "Damages received to compensate for economic loss, for example, lost wages, business income, and benefits, are not excludable from gross income unless a personal physical injury caused such loss"

So, you'd have to include compensation and punitive damages (if any) in your gross income for the year.
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Expert Comment

by:TommySzalapski
ID: 39942897
It makes sense, really. If you'd been paid the overtime in the first place, you'd've paid taxes on it.
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