Understanding Court Settlements and Their Tax Implications

We all want to be budget savvy! We want to look good when we go out with friends, don’t we? We want our houses to look like they came from the pages of some decor magazine, don’t we? We want to have careers that impress our friends – and of course we want our bank accounts – and investments & assets – to make us feel secure and comfortable. So now we have become our own budget socialite!

We have parking enforcement’s all around us these days, so it seems that we have more and more people that are putting money towards whatever defense they can for parking tickets – or rather for the lack of appropriate parking spaces. These tickets aren’t inexpensive. We have a lot of hard working people who give up their hard earned salaries so that they paid their mortgage or rent, go out and have dinner or lunch. The problem is – they didn’t plan on being dinged by parking enforcement officers. We have learned that life isn’t always easy or fair.

One day you walk down the street to grab lunch when you see a flyer that announces an event where you can earn cash during the day, and eat for free. Who doesn’t eat for free in Europe!? If you care to load your Friday schedule with one meeting after another, bobbing and weaving through traffic and the needs of your four or five clients before heading to the venue – you can earn cash working a few hours.

An ‘event’ isn’t a ‘party’ which is why you may not get dressed up for work. An event is like a ‘court settlement’ – who would have thought we would be talking about court settlements within the confines of our lunch hour!? But here we are, conjecturing how to handle an abrupt and unplanned influx of cash into our accounts.

What is a court settlement? A settlement occurs when the plaintiff and defendant agree to resolve a dispute without further legal proceedings. A court decision is when a judge makes a decision about your case. Most court cases end up with a settlement, so that each party saves time and expense. A plaintiff is a person that applies to a court for a legal remedy. A defendant is a person that’s been accused of committing a crime or a person that’s been accused of causing harm or discomfort to the plaintiff, provided that the evidence of such actions have been backed by supporting documentation.

A court settlement is typically reached with the assistance of mediation or arbitration. Mediation is when a third party helps both sides negotiate an agreement or settlement. Arbitration is when a third party listens to both sides and makes a decision in favor of one of the party’s involved. Typically, a plaintiff would like to settle a case because it’s less likely that a jury or judge will have difficulty proving their side of the dispute and it’s less likely that the plaintiff will have to wait to receive their compensation.

So, you’re wondering whether court settlements are subject to taxes, aren’t you? Well this is where we make the connection between our discussion about court settlements and the Budget Socialite! You are a budget savvy person, aren’t you? Do you want the full amount of your settlement in your account? If the answer is yes, then you need to understand that those funds will be subject to tax.

The article by LalaSicecream outlines the possible tax consequences following an award or settlement. Typically, the legal professionals, accountant or tax advisors for the plaintiff will be able to assist you in managing the funds and ensuring the correct forms are provided in your windfall. Make sure you ask your professionals what is required.

Although the issue of whether or not a court settlement may be taxed, understanding that it may be subject to the tax man, is an important tip in your lifestyle and behaviour as the ‘Budget Socialite’.

Once you have confirmed that you will be receiving funds from a settlement then you don’t want to be hiding under a rock until you’re ready to spend those funds. You want to budget the funds to avoid, as much as possible, the inflating your lifestyle. We touched on inflation as a budget concern a few days ago, but suffice it to say that you want to avoid spending money you don’t have.

Making adjustments to your weekly or bi-weekly budget is essential. You’re not likely to put all the extra money into savings – but you can make reductions across the board. You can make a commitment to only spend 50% of the windfall for entertainment and food and 50% for your taxes and bills. You will find many ideas about budgeting for your windfall as the Budget Socialite evolves. A financial adviser is a great professional resource as you digest your good financial fortune.

Of course, if a settlement is reached, you don’t sign off on the dotted line without clear understanding of the requirements of the funds and your obligations. We can help you understand your legal obligations.