Income Tax Planning and Return Preparation
Income tax planning in advance of settlement is one of the essential steps in deciding how to receive settlement proceeds. When the settlement amount may include taxable elements, such as pre- or post-judgment interest, reimbursement for medical expenses that were deducted in prior years, or potential punitive damages, income tax planning is a must to avoid surprises that might influence the willingness to settle or to accept a portion as a structured settlement.
Assume, for example, that a plaintiff is about to accept a $1,000,000 taxable settlement and pay a 40% contingent fee and costs. In that case, the plaintiff will owe approximately $450,000.00 in federal and state income tax (in California) because the contingent fee is not deductible. After fees and taxes, the plaintiff will be left with only $150,000.00. The largest share of the $1,000,000 went for taxes, the next largest share went to the attorney, and the plaintiff was left with the smallest of the three shares. If there are liens, further reducing the recovery, the case should probably not have been brought.
The Settlement Law Group can provide solutions to that problem. The same adverse results occur to a lesser extent when the case is nontaxable but contains pre- or post-judgment interest or punitive damages elements. Those taxable elements can arise even if you insist in a settlement agreement that they do not exist. Return preparation is important after the settlement to ensure that required disclosures are made appropriately. You should not rely on accountants who have no experience in the area for such work. Contact us today to learn more about tax planning in settlements. We look forward to hearing from you.