Today TaxMama hears from Teddy in the TaxQuips Forum with this question. “What is the tax rate on a settlement that is classified as emotional distress?”
Hi Teddy,
Well, it’s good to get the settlement, though it doesn’t cure the problem.
But emotional distress is taxed as ordinary income.
So the tax rate will be whatever tax bracket it pushes your income to.
In other words, if you were already in a 15% bracket, some or all of the settlement might push you into a 25% or 28% bracket.
You get the idea.
That’s OK. It’s better than not getting the money.
Incidentally, remember to deduct the legal fees.
And remember, you can find answers to all kinds of questions about lawsuit settlements and back taxes, and other tax issues, free. Where? Where else? At www.TaxMama.com.
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