I just recently received a settlement check. Are there ways I can minimize tax liability?
I just recently received a settlement check. Are there ways I can minimize tax liability?
Answers
-
The first thing to determine is the nature of the settlement to include the income as ordinary or capital gain depending on the settlement. Publication 17 chapter 8 page 75 produces a list of items/judgements that must be claimed as ordinary income.
If the settlement award is ordinary income using the above criteria, there is nothing that can be done to minimize the tax liability and it needs to be claimed as "Other Income". This means it will only raise your taxable income.
In the rare case of a Capital Gain type settlement, you would use your investment cost to figure the actual realized gain on your taxes minimizing the income that flows to your individual tax return.
