How are class actions taxed?

[CalDisneyMomof2]

I'm receiving a nice settlement here in November. My amount has been given to me already but I was just curious how they figure out how to tax it? The notice says it WILL BE taxed prior to the delivery of the check. Anyone?

(In the budget board because I'd like to BUDGET for some upgrades to next year's vacation! )

 

[davper]

Unless you claimed a loss on your taxes previously, I don't see why it would be taxed.
Court settlements are usually reimbursements for losses incurred.

 

[eliza61]

Unless you claimed a loss on your taxes previously, I don't see why it would be taxed.
Court settlements are usually reimbursements for losses incurred.

Depends. My dh got an award from a discrimination class action. He got a huge hit. The award was for a difference in pay, company was paying blacks a lot less than others for the same job. Anyhoo. Irs said the award was part back wages so it was taxed at ordinary income. Knock us into the 33% tax bracket and definitely ate up about 20% of the award

 

[davper]

Yes, in that case, taxes should be owed.

OP, what is the settlement for?

 

[CalDisneyMomof2]

Unpaid wages so it will be taxed.

 

[tvguy]

You need to talk to a tax professional, but I suspect if they have warned you it was taxable, it is taxable.
It seems generally settlements are taxable at your tax rate, or the tax rate that the settlement boosts you into.
http://www.forbes.com/sites/robertwood/2012/10/01/irs-gets-a-share-of-most-legal-settlements/

 

[Claire&TheBoys]

I suspect it will be treated like a bonus. Bonuses are often taxed at a flat rate, either 28% or 33%.

 

[supersnoop]

I suspect it will be treated like a bonus. Bonuses are often taxed at a flat rate, either 28% or 33%.

That's not accurate. Bonuses might have taxes withheld at a high rate, but the mere fact that it's a bonus (or court award) doesn't set that tax rate.

 

[CalDisneyMomof2]

You need to talk to a tax professional, but I suspect if they have warned you it was taxable, it is taxable.
It seems generally settlements are taxable at your tax rate, or the tax rate that the settlement boosts you into.
http://www.forbes.com/sites/robertwood/2012/10/01/irs-gets-a-share-of-most-legal-settlements/

It's being taxed before disbursement though.

 

[CalDisneyMomof2]

Double post

 

[Claire&TheBoys]

That's not accurate. Bonuses might have taxes withheld at a high rate, but the mere fact that it's a bonus (or court award) doesn't set that tax rate.

No, but the tax code allows bonuses to be taxed at a flat rate no matter what the individual's regular tax rate would be. It used to be that they could be taxed at 28% - I remember looking it up when I got a work bonus and much more was withheld than I expected. My boss (a CPA) looked it up in the tax code and showed me where the percentage was stipulated. I was thinking it went up since then, as that was several years ago now.

 

[kool_kat]

No, but the tax code allows bonuses to be taxed at a flat rate no matter what the individual's regular tax rate would be. It used to be that they could be taxed at 28% - I remember looking it up when I got a work bonus and much more was withheld than I expected. My boss (a CPA) looked it up in the tax code and showed me where the percentage was stipulated. I was thinking it went up since then, as that was several years ago now.

What supersnoop said was correct. Bonuses are required to be WITHHELD at a flat rate. So, if her award is 10,000 a flat 28% (or whatever the rate is - I'm too lazy to look it up) would be withheld and she would receive 7,200. Then when she files her taxes she actually pays tax at whatever her graduated tax rate is and gets credit for the 28% withheld.

This is just like your regular paycheck. The amount is withheld based on a table but that is not what is actually taxed - that is determined at the end of the year when you prepare the taxes and get credit for everything withheld. The only difference is that a bonus is withheld at a federal rate and your regular paycheck is withheld based on a table that estimates the tax you will probably owe. Since a bonus is an irregular payment, there is no way for your company to estimate your tax bracket - hence the required flat withholding.

 

[supersnoop]

It's being taxed before disbursement though.

No, it's not being taxed. Rather, they are withholding a certain amount for taxes which will be reported to you (most likely on a 1099), and you'll report the income and withholding on your taxes next year.

Maybe it's just semantics to some people, but you really need to understand that the amount withheld is not equal to the amount you pay in taxes.

 

[CalDisneyMomof2]

No, it's not being taxed. Rather, they are withholding a certain amount for taxes which will be reported to you (most likely on a 1099), and you'll report the income and withholding on your taxes next year.

Maybe it's just semantics to some people, but you really need to understand that the amount withheld is not equal to the amount you pay in taxes.

I understand that. Poor usage of words. My question is really how much will be withheld?

I know what my tax bracket will be by end of year but just wondering what my net will be when I get the check end of November. I wasn't sure if my rate that is withheld currently would be used or like others have said if it'd be treated like a bonus. A majority of my husband's income is commission in which 40% of his check is withheld so I'm used to the big chunks of money being withheld.

 

[Mickeyluver37]

There is really no way of knowing how much they will withhold beyond the FICA taxes. It is absolutely not true that the employer must withhold any federal or state income taxes, although many do as common practice. I work for a very large company with in house payroll and employees in all 50 states- we withhold 0 income taxes from bonuses. We withhold payroll taxes only (ss and med) on bonuses.

 

[tvguy]

It's being taxed before disbursement though.

Or did the notice just say they would withhold taxes? Anything above a certain amount requires withholding so the IRS makes sure you don't blow the money before they get their share.

 

[amylevan]

If it's being treated as a bonus they can calculate the withholdings either by:
1. a flat 25% (unless it's more than 1 million, than it's 39.6% on the part above 1 million)
2. the aggregate method, which in a nutshell, adds your regular wages to the bonus and figures your tax percentage as if that were your regular wage

And if it's backpay - it's treated as supplemental income, which is taxed like bonuses.

 

[amylevan]

There is really no way of knowing how much they will withhold beyond the FICA taxes. It is absolutely not true that the employer must withhold any federal or state income taxes, although many do as common practice. I work for a very large company with in house payroll and employees in all 50 states- we withhold 0 income taxes from bonuses. We withhold payroll taxes only (ss and med) on bonuses.

Is your company "gross-up"ing the bonus and paying the taxes for you? Because they really should be withholding otherwise.

 

[NewRVLady]

After our company declared bankruptcy, we both received settlements a good time later , when all was settled
DH was owed a lot-bonus money, paycheck, expense check. he received like 25-30% of it. then to pay taxes on top was kinda funny
(He also lost thousands of $$ in Commissions for work sold and being produced)

 

[tvguy]

After our company declared bankruptcy, we both received settlements a good time later , when all was settled
DH was owed a lot-bonus money, paycheck, expense check. he received like 25-30% of it. then to pay taxes on top was kinda funny
(He also lost thousands of $$ in Commissions for work sold and being produced)

Yeah, IRS doesn't care you should have earned $100,000, they just care you earned $100 and they want their cut.