How are lawsuit settlement monies taxed?
If I receive $35,000 in back wages(40%) and interest and penalties (60%) as well as a $75,000 lead plaintiff enhancement, how will I be taxed? I will already make $108,000 in wages in 2011 before this. Also, how can I shelter this income from taxes?
Settlements from lawsuits are taxed based on what the settlement funds represent. For example, back wages are taxed as ordinary income, also interest. Punitive damages are taxed as ordinary income. The only thing that’s not taxed is compensatory damages, such as reimbursement for medical bills past and future.
There is no way to shelter the money from taxes. I didn’t see anything in your list that would be exempt from tax.
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