After receiving a lawsuit settlement, it can be tempting to use the money to make big purchases or take a much-needed vacation. However, before making any decisions on what to do with your newfound funds, it’s important to understand the potential tax implications. Failing to properly manage your taxes can result in costly mistakes, penalties, and even legal trouble. In this article, we’ll discuss the top tax mistakes to avoid after receiving a lawsuit settlement to help you make the most of your settlement money without incurring unwanted expenses.
Failing to Account for the Taxable Portion of the Settlement
One of the most important things to understand is that not all of your lawsuit settlement is tax-free. Depending on the nature of the lawsuit, a portion of the settlement may be taxable. For example, if you receive a settlement for lost wages or punitive damages, that portion of the settlement is taxable income. It’s important to consult with a tax professional or attorney to determine what portion of your settlement is taxable and how to best minimize your tax liability.
Not Reporting the Settlement on Your Tax Return
Another common mistake is failing to report the settlement on your tax return. It is important to include the settlement on your tax return and provide documentation, even if you think it’s tax-free. Failing to report income can result in penalties and interest charges from the IRS.
Misunderstanding the Statute of Limitations
To put it simply, the statute of limitations is the timeframe in which you must file your tax return or request a refund. Knowing the statute of limitations in your state is crucial, as it can affect your ability to receive refunds and may result in penalties if you file your taxes late. Be sure to file on time to avoid missing out on refunds or facing penalties.
Failing to Plan for the Future
Finally, it’s important to plan for the future and make the most of your settlement money. To stay on track with your long-term financial objectives, avoid spending money on unnecessary items. Use it instead to pay off debts, establish emergency savings, or invest in a retirement fund. Seek guidance from a financial advisor, such as Ideal Tax, to create a plan that fits your goals and minimizes tax concerns.To avoid unexpected expenses and maximize your settlement money, it’s important to consider the possible tax implications of your lawsuit settlement and take the necessary steps to manage your taxes. By consulting with a financial advisor or tax professional, you can gain greater control over your finances and secure a brighter future for you and your family.