Cash Settlement Tax Implications

Tax Implications of Cash Settlements Tax Implications Once a cash settlement is pending, the first smart question any recipient should ask before taking the check is, how much will I pay in taxes for this? New money is generally considered taxable income by the U.S. Internal Revenue Service (IRS). Only under certain exceptions are new funds not reportable and/or taxable. Many times the funds received have to be reported on income tax filings, so regardless of how it's received, once reported the figures add to the total income earned in a given tax year. The two main categories of taxing cash settlements are alimony and property settlements. Alimony is considered an income cash settlement or cash stream. As a result, for the recipient the money is taxable. The payer gets a tax deduction since he or she would otherwise be taxed when there is no control on how it is spent. A property settlement is a cash payment to compensate someone's loss. As a result it's generally not taxable. The fine details are spelled out in the IRS Publication 504. The gray area in between these two parameters is everything else. The trick to proper tax planning is to get the answers for what will be charged and how before accepting the cash settlement. Once accepted and received, the recipient is stuck with the tax treatment that applies. There's no going back for a re-spin or second try. So for purposes of reducing taxes as much as possible, mapping out how the cash settlement receipt will occur is critical. Conclusion Cash settlements require planning, anticipation, and financial savvy to get the most benefit. Too often people just rush towards the cash without thinking, leaving as much as half the money on the table to taxes and mistakes as a result. If you're not sure how to manage a pending cash settlement, talk to a financial advisor and expert on what your options are. Keep in mind, he or she may try to sell you investments you don't need, but it doesn't hurt to get an expert opinion on what all your alternatives are. Many times the advice can avoid paying too much in taxes or can help maximize interest earned on the funds once received and deposit. Also keep in mind, once you have a cash settlement, those in the know like family members and close friends will be interested in possibly getting a share. Manage your money well and don't let it come between relationships that you rely on for support. Sometimes privacy can be the best road, simply not letting people know about the good fortune in the first place. In this case, what they don't know definitely won't hurt them.

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