Good News: Your Settlement Is (Probably) Tax-Free! Know Your Rights Next Tax Season
This tax season, several clients reached out to our team at Kevin Patrick Law with the same question: “Do I have to pay taxes on the money I received in my settlement?” We’re so glad you asked! It’s important to know your rights as a taxpayer. To help you in future tax years, we put together this quick guide. THE TAX BASICS As a general rule, you do not have to pay taxes on your settlement if it was for physical injuries, physical sickness, emotional distress, or mental anguish. Most of the settlements we win for our clients fall into these categories and are entirely tax-free. However … THE EXCEPTIONS Depending on your circumstances, you may have to pay taxes on part of your settlement. If you took an itemized deduction for medical expenses related to your injury in a prior year, for example, you’ll need to include the amount
of that deduction as income. Specifically, you should report it as “Other Income” on line 21 of your Form 1040. Here’s an example. Imagine you were injured in a car crash in August 2019 and had to go to the hospital. When it was time to pay your 2019 taxes in April 2020, you deducted your hospital bills to get a tax break. Then, in 2021, you received a settlement covering your medical bills. You would have to count the portion of the settlement covering your 2019 hospital bills as “Other Income” on your Form 1040. This gets more complicated if you’ve deducted medical expenses related to your injury multiple times over several years. You might want to ask an accountant for help, as it can get a bit tricky! HELPFUL RESOURCES To learn more about these nuances, reference the IRS “Settlements — Taxability” report at IRS.gov/pub/irs-pdf/p4345.pdf and the agency’s other resources at IRS. gov/government-entities/tax-implications-of-settlements-and-judgments. Hopefully, this guide was helpful! Hang on to it if you expect a settlement in 2022, or pass it on to a friend or family member who’s in the middle of a case so they can reference it next tax season.
Summer Strawberry Spinach Salad
Take A Break
This refreshing and seasonal salad will go great with whatever meat you throw on the grill this Memorial Day.
Ingredients • 3 tbsp balsamic vinegar • 1/4 cup olive oil •
• 1/3 cup raw, sliced almonds • 5 oz organic spinach • 2 cups strawberries, halved • 1 large avocado, sliced • 1/2 small red onion, thinly sliced • 1/2 cup feta crumbles • 1/4 cup roasted pistachios, chopped
1 garlic clove, grated or finely minced
• 1/2 tsp Dijon mustard • 1/2 tbsp strawberry jam • Freshly ground salt and pepper, to taste
Directions 1. In a small bowl, combine balsamic vinegar, olive oil, chopped garlic, Dijon mustard, and strawberry jam. Mix well. Add salt and pepper to taste. 2. In a pan, toast the almonds over medium heat until they are golden brown. 3. In a large bowl, add spinach. Then layer on strawberries, avocado, red onion,
Solution
feta, toasted almonds, and chopped pistachios. 4. Toss dressing in salad or serve on the side.
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