Author Topic: Help! Is this class action settlement taxable??  (Read 361 times)

Villanelle

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Help! Is this class action settlement taxable??
« on: March 04, 2019, 07:28:17 PM »
We received $36k for a class action settlement in 2018.  We have been padding our checking account in anticipation of needing to pay income taxes on that.  However, we haven't received a 1099.  (Would it even be a 1099?)  We've contacted the person with whom we communicated prior to receiving the settlement (over a year ago, but also contacted a general number for the firm) and have not gotten a response to any of our attempts.

We've also moved (in mid-January), and although we do have our mail forwarded, I suppose it's possible something is lost in the shuffle. 

The settlement is from an investment property.  In short, apparently the sellers were telling buyers that their deposits were non-refundable, when that was not allowable by state law.  It made no difference to use as we never considered backing out, but we certainly didn't complain about the nice little check!

My research tells me that settlements where there was physical harm are not taxable.  However, "When a lawsuit is related to anything that did not cause physical harm-discrimination of any kind, loss of income, or devaluation of an investment-the lawsuit settlement proceeds are taxable."

That suggests to me this would be taxable, but I suppose it might be considered something that devalued the property, maybe? 

I know no one can give legal advice on an internet post and I will certainly not consider anything anyone says to be legal or expert advice.  IOW, you are legally off the hook for whatever you tell me.  So, any thoughts on whether we need to try harder somehow to get tax info? Or should we report it on our own, without the 1099?   Or if we can feel confident this isn't taxable?  Or...??
« Last Edit: March 04, 2019, 07:30:39 PM by Villanelle »

reeshau

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Re: Help! Is this class action settlement taxable??
« Reply #1 on: March 05, 2019, 02:55:34 AM »
If this is getting your money (deposit) back, then I would expect it is not taxable.  Was that money from a checking account, or some type of retirement account?  If it is pre-tax in some way, then you may need to take action to be in the clear.

Case in point:  I once had a small settlement from stock I owned in a company in an IRA.  When I got the check, I deposited it back into my IRA as recovery of funds (or something like that).  There was no gain, and no tax.  (it also, after some haranguing with the brokerage because it is unusual, did not count as a contribution that year)

In a case of lost wages or compensation for an accident or other liability, this is new money coming in to you, so I can see where that is considered taxable.

There is provision, of course, on the 1040 and in most tax software (sounds like you are DYI) to report income not reported on a 1099.  If the check is big enough, a confident answer to this question alone may make it worth your while to engage a tax professional for this year, and get their stamp of approval on it.

MustacheAndaHalf

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Re: Help! Is this class action settlement taxable??
« Reply #2 on: March 05, 2019, 09:59:55 AM »
I can't vouch for the website or this person's status as a tax attorney, but it suggests another possibility:

"Should lawyers even issue Forms 1099 to clients? Practice varies, but
most lawyers do not need to issue a Form 1099 to their client for settlement
monies. The reason is that lawyers receiving a joint settlement check to
resolve a client lawsuit are usually not considered payors of the money. The
settling defendant has the obligation to issue the forms, not the lawyer."
http://woodllp.com/Publications/Articles/pdf/Lawyers_and_Form_1099.pdf

Villanelle

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Re: Help! Is this class action settlement taxable??
« Reply #3 on: March 05, 2019, 01:01:58 PM »
If this is getting your money (deposit) back, then I would expect it is not taxable.  Was that money from a checking account, or some type of retirement account?  If it is pre-tax in some way, then you may need to take action to be in the clear.

Case in point:  I once had a small settlement from stock I owned in a company in an IRA.  When I got the check, I deposited it back into my IRA as recovery of funds (or something like that).  There was no gain, and no tax.  (it also, after some haranguing with the brokerage because it is unusual, did not count as a contribution that year)

In a case of lost wages or compensation for an accident or other liability, this is new money coming in to you, so I can see where that is considered taxable.

There is provision, of course, on the 1040 and in most tax software (sounds like you are DYI) to report income not reported on a 1099.  If the check is big enough, a confident answer to this question alone may make it worth your while to engage a tax professional for this year, and get their stamp of approval on it.

It's not getting out money back.  As I understand it, it's just compensation for being told the deposits were non-refundable.  (This was presumably, a way of strong-arming people who had second thoughts and wanted to back out but didn't want to lose their deposit and thus went forward when they otherwise wouldn't have.  I believe legally everyone had 2 years to back out, or something along those lines. )

reeshau

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Re: Help! Is this class action settlement taxable??
« Reply #4 on: March 06, 2019, 06:34:34 AM »
Ah, I had read it as a return of the refund, explicitly.  Is it structured somehow as a percentage of your purchase price, or a flat rate? If the former, I could see viewing it as a rebate, which would not be taxable.  If it was a flat award, or somehow not tied to the price you paid, then it is indeed new money.