Sue Me, Sue You

Factual Questions
1

Let’s consider the simplest of circumstances:

I sue you for $X.
I win. You lose.
You pay me $X.

Questions:

  1. It seems to me that the $X I’ve just won (minus Lawyer fees, sure) is “unearned income”… how does the tax schedule work on winnings from lawsuits? Looking at this year’s 1040A, I don’t see where somebody would claim this (or even a note refering to a schedule where it would be claimed as income).
  2. Is there any sort of deduction in it for you? Can you claim a lawsuit loss (plus Lawyer fees) as some sort of capital depreciation?

Not that I’m planning on suing you. Just something I thought about during this morning’s mandatory EEOC training.

2

Might it not be taxed as game show winnings are? Surely that’s not earned.

I know that if a credit card writes off your debt, it is taxable. My guess is any money you get…the IRS sees as “earned”.

If you can’t convince them, confuse them.
Harry S. Truman

3

Depends on the nature of the lawsuit. If you contract to sell me 500 widgets, which you deliver and I fail to pay for, the part of your recovery (after you successfully sue me) that would represent your profit is taxable. Personal injury or property damage recoveries are generally not taxable, as you are not gaining anything. You are being compensated for the loss of your arm, damage to your car, or whatever.

4

What Random said. Additionally, punitive damages are taxable, and the portion of any judgment or settlement that is specifically allocated to lost income is taxable.

-Melin

5

Hot dog, my college degree in accounting finally pays dividends. The IRS makes it vaguely difficult to find their true answer to your questions, but it is pretty much inline with the above posters.

I went to the IRS website and downloaded Publication 17. ON pages 88 and 89 it deals with lawsuits.

and

Finally, for various court awards

I know, pretty long and pretty dry, but this should help (along with Pub 525 mentioned above.)

Well, shut my mouth. It’s also illegal to put squirrels down your pants for the purposes of gambling.

6

Excellent! Thanks to all, and especially Mullinator. That answers the OP and then some.

Game show winnings, though (as per Banks’ response)–THAT’S got to count as unearned income, I’d think. Or does the studio (or whoever) call you an employee (ie., performer) and send you a check (minus FICA, etc.) and a W-2 at year’s end? Contract labor?

Is it too late to name this thread “burning tax questions”?

7

There is a section on that in Pub 17 also. I don’t know the page, but if you go to the IRS website you can download it (must have Adobe). The last few pages are the index and should point you to the correct place.

Well, shut my mouth. It’s also illegal to put squirrels down your pants for the purposes of gambling.

8

On a similar note, how do professional gamblers report their taxes?..Would their winnings be earned or un-earned income?

9

Mullinator, excellent reply, but if people are going to be looking for tax answer from the IRS, I think this it the link you meant. http://www.irs.ustreas.gov

10

JimB, near as I can tell it took me to the exact same page. Regardless, they both work.

11

Game show winnings are taxable, as are gambling winnings. Gamblers can deduct gambling losses, however.

12

Only to the extent of gambling winnings. That is, I can’t show a net gambling loss in a given tax year… but if I win $5K some lucky night in Atlantic City, I can deduct other gambling losses during that year, if I had them, up to but not exceeding $5K.

Learned this in 1996 when I won $2,250 in six hours at blackjack!

  • Rick
13

On the tax forms, they ask if you made any money from selling drugs. If you report it & tax it right do they still come after you?