I got a $500 payout from a class action lawsuit, but I just got a 1099-MISC from the law firm saying I made $1000.
I only received $500, though—the law firm kept the other half for fees. But the form doesn’t mention that, it just lists the full $1000 as ‘Other Income.’
Does this mean I’ll be taxed on the full amount even though I never actually got all of it? If my tax rate is around 40-50%, wouldn’t that mean I end up owing almost as much as I actually received? Feels like I lost my whole settlement to taxes…
I’ve never heard of getting a 1099 for a lawsuit settlement. Was this for lost wages or back pay? That could make it taxable. Otherwise, it’s just compensation for being wronged, not actual income.
Bennie said:
I’ve never heard of getting a 1099 for a lawsuit settlement. Was this for lost wages or back pay? That could make it taxable. Otherwise, it’s just compensation for being wronged, not actual income.
It happens. In this case, the company paid $1,000 per person, but the law firm took $500 in fees. The IRS still sees the full $1,000 as income, even though the person never got the whole amount.
Bennie said: @Ali
Weird. I’ve received bigger settlements and never got a 1099. Feels like only certain types of settlements get taxed.
Yeah, settlements for physical injury usually aren’t taxed, but if it’s for something like defamation or breach of contract, the IRS sees it as taxable income.
Since this was about data misuse, it looks like it falls under taxable income. The worst part is that you still owe tax on the portion your lawyer took. Makes you wonder if these lawsuits are even worth it.
Bennie said:
I’ve never heard of getting a 1099 for a lawsuit settlement. Was this for lost wages or back pay? That could make it taxable. Otherwise, it’s just compensation for being wronged, not actual income.
Not sure… just seemed like a standard class action settlement. They sent my share through Venmo, which seemed kind of strange but legit.
@Sky
I’d check with the law firm. If they issued a 1099-MISC, they must have had a reason for it.
You should also look into how to report it on your taxes. Sometimes, depending on the situation, you can categorize it in a way that reduces your tax burden. But if you just report it as regular income, you could end up paying way more than you should.
Might be worth talking to a tax expert before filing.
Zephyr said:
Where are you that your tax rate is 50%?
I’m in the U.S. My actual tax rate isn’t 50%, I was just exaggerating. But even at 35-40%, most of the settlement is gone.
Legal fees used to be deductible in some cases, but that changed with the 2017 tax law. Now, you often have to pay tax on the full amount even if a chunk went to your lawyer.
@Zephyr
So it’s possible to win a lawsuit and end up worse off? If your tax rate is higher than the percentage of the settlement you actually got after legal fees, you could lose money?
Sky said: @Zephyr
So it’s possible to win a lawsuit and end up worse off? If your tax rate is higher than the percentage of the settlement you actually got after legal fees, you could lose money?
Sky said: @Zephyr
So it’s possible to win a lawsuit and end up worse off? If your tax rate is higher than the percentage of the settlement you actually got after legal fees, you could lose money?
The highest federal tax rate right now is 37%, so the most you’d owe on $1,000 is $370. But that only applies if you’re making over $600K a year. Most people will be in a lower bracket, so the tax hit won’t be quite as bad.