Auto Insurance Discuss

My wife was in an auto accident. Our attorney negotiated a small settlement with the insurance company. IRS claims we owe tax on the settlement because our attorney reported the settlement amount as non-employee compensation paid to us. I thought insurance settlements were non-taxable income. Need help or the proper publication in the tax code to cite when I respond to the IRS. Thanks

Answer:

It is taxable, especially burdensome if it a lump sum, because you pay the tax on the entire amount of the settlement even though your lawyer got anywhere from 25-50% of the money. You may be able to average it out over a few years though, but I’m not sure the procedure.

There must be some kind of way to get around this by, I don’t know setting up some sort of charitable foundation devoted to helping accident victims fight big insurance companies. Have the insurance make it to that foundation (that you have created), advertise that your foundation helps accident victims fight big insurance companies, and keep at least 60-70% money in there for that use if needed, turn the leads over to your attorney and have a percentage of funds paid to you as finder fee and portion donated back into the fund) Seems to me everybody gets a tax-write off of some sort, since you would actually be receiving a payment. Make the insurance company pays the foundation but does so on your behalf (so you get a charitable deduction, not them, after all you had to fight them tooth and nail to get what you got.) And if they refuse tell them you’ll go to the press and sing like a canary about their back office strong arm tactics, and they’ll pony up.

Go to irs.gov.com

Then go to Tax Help Government Information

Then go to forms and instructions on the left hand side.

You will go to 1099-MISC

It will tell you what should be reported and what should not.

Maybe your attorneys accountant made a mistake because indeed she did not receive this money for services rendered. This way you pay taxes and social security. If they put it down as other income you would only pay taxes.