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Litigants In Lawsuit Case May Face Taxation

If you will be receiving a settlement due to some form of litigation, then you're probably wondering about more than just the amount of compensation you'll receive. One of your main worries may be the lawsuit taxation that you feel might follow hot on the heel of receiving your compensation. There is good reason to wonder about it since the amount you receive may very well be taxable depending on the options you choose. Whether a settlement is taxable is determined by whether it's a lump sum payment or an annuity.

If you are taking a lump sum payment in compensation for negligence, injury or other wrongdoing, prepare to pay the IRS. Lawsuit taxation is allowed in the case of lump sum payments to litigants. You will have to take the necessary steps to make sure that the amount is paid to the government on time so that you don't end up wind up paying any penalties. Failing to make your payment of taxes to the IRS for any lump sum payment you might receive can put you in the unenviable position of not only paying the taxes you owe, but also a late payment penalty to the government. Find out from your lawyer or visit a tax website to find out what forms you'll need, when and where you must send your payment.

Lawsuit Taxation Or Tax-Free Settlement?

If you have the option to choose, you should choose annuity payments in cases of large settlements, to avoid lawsuit taxation. Annuity payments are usually equal payments made over a course of time. In some cases it may be a few years or it may be even longer. What makes annuity payments preferable over lump sums is the fact that annuity payments are tax-free. This type of settlement also remains tax-free if you choose to sell your future payments to a settlement buyout company. The only way that you will end up paying taxes on annuity payments is if you take a lump sum buyout amount and reinvest it. By doing so, you will end up paying taxes on any interest or dividends you might receive from your investment.

Lawsuit taxation is one of the major issues you'll face when you're about to receive a settlement payment. Take the time to find out what options you'll have by talking to your attorney. In the end, the best option for you is the one that will help you the most financially.

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