From: Willis, TX

Dear TaxMama,

My father died from lung cancer that he got while working in chemical plants.

I am receiving out of court settlements from several of the companies he worked for, and several more to come.

Is this money taxable?

If so, what type of income, and what is the tax rate??

Total settlement amounts will be approx. $250,000 prior to my lawyer fees, which generally run about 40%.

Thanks for your help in this matter.

James

 

 

 

Dear James,

What an awful way to lose your father.

Clearly, such a small sum will not be much compensation for losing someone you love.

However, at least on the financial score, I have good news for you.

Since the settlement is based on a physical illness, none of that money will be taxable.

Unless the companies issue your family a 1099 form, you won't even have to report it.

If they do issue the 1099, be sure to include the income on your tax return, then deduct it back out.

Remember to include a page with the tax return explaining that the money was for a tax-free settlement based on a physical injury to your father.

Uh, I just had a bad thought. Is the settlement being paid to your father (or his estate) for his illness, or to the family for losing him?

In the first case, my advice holds true.

In the second instance...please pay your tax advisor to research this for you so you have an official, written answer.

I am not sure if the same holds true in the second scenario.

A settlement on behalf of the family for losing him could well be taxable. Sorry...I hate it when I start seeing all sides to a question. Don't you?

Be sure to get the answer before you get the settlement money. That way, you'll still have time to negotiate the wording of the settlement to ensure that it will be tax free.

Since you're in Texas, if you don't already have a tax professional, you might want to contact Greta Hicks and have her help you with this matter.

Please accept my condolences on your loss.

Best Wishes,
Eva Rosenberg, MBA, EA