Won a Hefty Settlement? Here Comes the IRS!

Your lawyer has worked hard for you and won you a hefty settlement and you’re feeling pretty good. But before you pop the cork on that champagne, you’d better familiarize yourself with tax laws, and particularly the Alternative Minimum Tax law.

The Alternative Minimum Tax law was passed in 1969 to prevent high-income individuals and corporations from using deductions to avoid paying taxes altogether. While originally aimed at people and companies earning over million dollars a year, the tax is increasingly having its effect on those earning much less, as little as a hundred thousand a year. Also, the tax disallows exemptions, including state and local income taxes, and deductions such as lawyer’s fees. This means that if you win a million dollar settlement and your lawyer charges you three hundred thousand dollars, you will owe taxes on the entire million. Add to the tax burden your state and local taxes and the fact that you may be responsible for an entire settlement even if you only receive part of the settlement (because someone else receives a portion), this means that in some instances you may be responsible for more money than you receive.

The U.S. Congress has become aware of the gross inequities resulting from the Alternative Minimum Tax law, and bipartisan support is growing to jettison the statute. Meanwhile, if you decide to pursue a legal case that could put you in the position of paying this tax, check with a good accountant before you begin. You could save yourself a hellish headache when the tax bill comes due.