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Old 11-27-2018, 04:00 PM
 
Location: Manhattan Beach
31 posts, read 13,413 times
Reputation: 66

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Hello there.


I am about to receive a sizable settlement from a former employer (about $300k) due to some discrimination that happened a few years ago. It's nice, and I have since started my own business and am doing even better than I was when I worked for them, but $300k is still $300k.


Anyway, aside from the 33% I need to pay my attorney and $10k in court costs, the rest is mine.

I was given the question by my attorney as to how it is to be allocated. There is Lost Wages and Emotional Distress. I have gathered lost wages will be taxed as it would be on a payroll, and emotional distress would show up as 1099 income and I'd have to pay my own tax on it.

Is it best for me to try and minimize the "lost wages" portion? I also have read that "physical injury" isn't taxable, but emotional distress isn't, but there are some loopholes My main question is the following:


Should I negotiate to get as much as possible under "physical injury which lead to emotional distress", or does the IRS tend to scrutinize this tightly?

I don't want to mess with the IRS, but I also want as much as possible in my pocket. If our President doesn't have to pay taxes, why should I?
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Old 11-27-2018, 04:18 PM
 
Location: The Berk in Denver, CO USA
13,949 posts, read 20,201,871 times
Reputation: 22581
Lost wages: you pay 1/2 SS and Medicare, employer pays 1/2, income taxes are standard, increase your income and may affect how much you can put into Roth IRA

1099: you pay all SS and Medicare, income taxes are standard (except that you may get to exclude 20% of the income as a small business), you can put a lot into a SEP/Keough/whatever self-employed retirement deal is good. Read this https://www.nerdwallet.com/blog/inve...self-employed/

You don't need a CPA to understand your options, but you do need a tax prep expert.
I am not one.
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Old 11-27-2018, 04:40 PM
 
18,724 posts, read 13,501,465 times
Reputation: 14107
Pony up cause the tax man is coming. The 33% should go directly to the attorney so as to not be something you pay taxes on
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Old 11-27-2018, 05:02 PM
 
Location: 5,400 feet
2,577 posts, read 2,552,074 times
Reputation: 3596
Quote:
Originally Posted by Lowexpectations View Post
Pony up cause the tax man is coming. The 33% should go directly to the attorney so as to not be something you pay taxes on
I think all states require an attorney to maintain a client trust account. Usually, settlements go to the attorney, who places all funds in the trust account. The attorney then keeps whatever s/he is owed and pays the balance to the client, and issues a 1099 to the client for whatever amount was paid to the client.
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Old 11-27-2018, 07:17 PM
 
Location: Florida
4,312 posts, read 3,647,760 times
Reputation: 4013
You want the settlement to specific one of the non taxable settlements if you can. Sorry I can not think of them but this is common and your attorney should be able to tell you want you need to minimize taxes.


You are correct that you want as little as possible counted as wages.


I do not know if you get wages what impact that has on future SS payments at retirement. This might be important so I would do some research.
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Old 11-27-2018, 09:33 PM
 
Location: Kansas City North
3,988 posts, read 7,266,236 times
Reputation: 5767
Just an idea - donít know if itís feasible, but if the money is truly forthcoming in the next 4 weeks, could you get half in 2018 and the other half in 2019?
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Old 11-28-2018, 10:33 PM
 
114 posts, read 55,262 times
Reputation: 202
You need to talk to a CPA about several issues with the agreement. It's $300k.

There's a dangerous situation here with claiming too much of your settlement as physical or psychological injury to avoid taxes. It's a red flag for the IRS for both you and the employer that could cost substantial penalties. As a business owner you are more likely to suffer an audit so the liability is heightened for you.
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