Long story short, years ago when the economy had first taken a huge nose dive and real estate values plummeted, we had worked w/ our mortgage company on refinance. They had told us our credit wasn't good enough for a good fixed rate and talked us in to an arm loan.
A few months ago we receive a huge letter, stating theres a class action lawsuit against this company and that they had lied to us and many others at the time. So, they calculated a total they saw as compensation for what had been done to us, and we should receive a check in the next few months. It's not a huge amount, but a nice unexpected bonus. My question is, how much are we going to get taxed on this? It's not income, I guess you'd call it a settlement? We had the option of hiring a lawyer to possible get more money but opted against that.
Any knowledge on something like this would be appreciated. Thanks
Call the IRS - or go to IRS.gov and look up "other income - court awarded damages" you will get it straight from the horse's mouth.
Based on what you wrote, I'm guessing these are punitive damages which are taxable as income. You didn't give a lot of detail so it's just my best guess.
If the amount is over $600 you should receive a 1099 form. If the amount is less or you do not get a 1099 it doesn't mean it is not taxable, just that you must keep your own record. Photocopy the check and papers that come with it for your records.
For specific info, see IRS Publication 525, under Other Income, Court Awards and Damages
http://www.irs.gov/publications/p525/ar02.html#en_US_2012...#
This would be a good question to ask a CPA and let them help you determine the tax implications. There are probably many factors to consider.
It is considered ordinary income. You will receive a 1099, what letter behind it I do not know offhand. You must include it with your taxes because it is reference by your social security number. In other words the bank already claimed it under your social security number so if there isn't the corresponding claim you will be audited.
There are two kind of income, capital gains/losses and ordinary income. If it is not a capital gain/loss, it is ordinary income.
I am an accountant.
To the IRS it is income. I would take out at least 15-20% for the taxman.
Probably depends on factors not addressed in your post. Like, what your overall income is, and well, the entire rest of your tax return. There isn't going to be a rate someone can give you, it will likely be dependent on your overall tax filing.
Although, it may be considered compensatory and not taxable at all.
I would be sure you disclose it to whoever prepares your taxes. Or just call up an accountant an ask them what rate you should expect. From what I have seen, if it does end up being taxable, it may be 25%. But it may not be taxable at all depending upon how the settlement is viewed.
But, I'm not an accountant.
It depends on how it is viewed during settlement. It may not be taxed at all or may be based on your income. A friend won a lawsuit and had punitive damages. She was hurt in a car accident. She was not taxed on the money due to the language at filing. It is not always considered income, especially if their actions cost you.
