There are a lot of things to consider when you receive a lawsuit settlement. One of the most important is how the money is taxed.
The Canadian Revenue Agency (CRA) has some guidance regarding this. They provide examples of how settlements are taxable and exempt based on the nature and purpose of the payment.
ICBC Settlements Are Not Taxed
Does it seem strange that you haven’t had to pay taxes on the settlement money you received from a lawsuit? This is actually perfectly normal if you receive compensation from the Insurance Corporation of British Columbia (ICBC) in Canada.
Typically, ICBC is not taxed for the settlement money they pay out to people who have been injured in a car accident. This is because they already have deducted the income you would have been taxed for had the accident not occurred in the first place.
This is why you don’t have to pay tax on ICBC settlements and other forms of compensation you receive as a result of an auto accident in Canada. This also applies to ICBC Part 7 disability benefits and pain and suffering compensation you receive.
The ICBC insurance claim adjuster who represents you will often take into account the duration and severity of your injury, lost wages, property damage and damages for pain and suffering before paying out the settlement amount. However, this isn’t always the case and you should speak with an attorney who can help you ensure your legal rights are protected.
There are a few ways that you can avoid having to pay taxes on your settlement amounts. One of the most obvious is to make sure you don’t invest the money into something taxable.
A settlement may be a lump sum payment or it may be spread out over time. It is also important to remember that not all amounts are tax-exempt, so it is best to speak with an attorney about the specifics of your case.
You should also know that while your settlement money is not taxed, any investment gains you earn from the money are taxable as well. You can find out whether you are eligible for the capital gain or investment exemption in the IRC by contacting your lawyer and speaking to them about the matter.
The Canada Revenue Agency has long followed the surrogatum principle when determining if a settlement amount is taxable or not. This is a theory that states that payments are treated as equivalent to damages awarded in court if they were meant to replace what was lost.
Structured Settlements Are Not Taxed
Structured settlements are a popular method of paying compensation for personal injury claims. They offer several benefits to claimants and their families, including tax-free payments, creditor protection and asset protection.
A structured settlement is an annuity that pays periodic payments to a claimant or their beneficiaries over time. It can be purchased from an insurance company or an independent firm.
Typically, structured settlements are purchased through life insurance companies that have been authorized to issue these annuities. The settlement payments are usually guaranteed to be paid for the remainder of the annuitant’s lifetime and can also be transferred to an heir upon death.
The federal government and most state governments do not tax income received through structured settlements. In addition, the Internal Revenue Service (IRS) has ruled that the proceeds from a structured settlement are not income unless the recipient uses the money to earn interest, investment growth or capital gain, which would be taxable.
Although the IRS does not require that a structured settlement be invested in annuities, many plaintiffs choose to do so as a way to protect their future settlement. This is because it allows them to keep more of their money in their pockets while ensuring that they remain eligible for income-tested government benefits and credits.
Another common reason people opt for a structured settlement is because it allows them to pay off debts, which may otherwise be subject to hefty interest rates. These debts are often the result of poor money management or other financial difficulties.
In addition to this, a structured settlement can help individuals maintain their eligibility for income-tested government benefits and credits by providing guaranteed lifetime payments. This can significantly increase a claimant’s financial stability and help them manage their finances.
To ensure that you receive the most benefit from a structured settlement, it is important to consult with a qualified professional who can guide you through the process. A good attorney can provide valuable insight into your situation and can ensure that your settlement is structured in the most effective manner. A certified public accountant or actuary can also assist you in your decision-making process.
Personal Injury Settlements Are Not Taxed
Whether you received a settlement in a personal injury lawsuit or were awarded damages after a car accident, it’s important to know that your compensation is not taxed. However, tax laws are often complicated and it’s best to consult with an experienced Canadian personal injury lawyer before you make any decisions on how to manage your settlement payment.
Typically, awards for pain and suffering or other non-economic damages are not taxable because they are not considered income. Instead, they are intended to reimburse you for losses you have suffered from your injuries. This includes damages like lost wages, medical bills, and future loss of income.
The only exception to this is where an award for emotional distress or mental anguish was directly related to a physical injury or illness. For example, if Bob was injured by his neighbor’s lawn mower and the injury caused him to lose his reputation as a hardware store owner in the community, he would be taxed on his settlement award for $3,000.
In some cases, your lawyer may negotiate with the defendant’s insurance company to have your pain and suffering and other non-economic damages paid out of the settlement funds over time, rather than as a lump sum. This is known as a structured settlement and creates a series of regular, non-taxable payments that replace the one-time lump sum.
This is a great option for those who want to ensure that their damages aren’t taxed and they can keep them as their own. It can also be beneficial for people who have been injured in a way that prevents them from working again.
Many people are unsure of how they should handle their lawsuit settlements, especially when it comes to taxes. They hear horror stories about how a settlement could be siphoned off by the government to pay for other things.
This can be frustrating, and it’s important to remember that you don’t have to worry about a portion of your settlement being taken by the CRA or the provincial government. In most cases, your personal injury lawyer will be able to help you avoid this.
Severance Payments Are Taxed
If you receive severance pay as part of a settlement or because you were terminated or laid off, you may wonder if your payment is taxable. The IRS generally views severance payments as wages, so they are subject to federal, state, and Social Security taxes.
The exact amount of severance taxes you pay depends on a few factors, including whether or not your employer withholds them from your severance pay and the type of severance you receive. Typically, severance pays are part of the normal payroll deductions that employers withhold from paychecks, so they are subject to the same tax withholding rates as regular income.
Severance pay is also taxable in the year you receive it. That means that if you receive six months of severance pay in November, you’ll effectively get 17 months’ worth of severance income during the year, which can bump you into a higher tax bracket and increase your overall tax liability.
You can minimize the taxes you owe by working with your former employer to split up your severance package. That way, half of it will count as the first year’s taxable income and the other half will count as the second year’s taxable income.
In addition, putting some of your severance money into a tax-advantaged account is an excellent idea. For example, you might want to put your severance pay into an HSA (health savings account) or a 401(k).
Another option is to donate some of the severance money to charity. This is a great way to give back while helping your community at the same time.
Finally, you can put your severance pay into a 529 plan for education purposes. These types of plans are often referred to as tax advantage savings accounts and allow you to put money away for your children without incurring taxes on the earnings.
If you’re worried about how your severance money will affect your taxes, contact H&R Block to learn more. Our team of experts can help you understand the tax implications of severance payments and how to file your taxes.
Among many other things, David A. Grantham is a contributing author to UmassExtension West Vancouver Blo. He is a renowned expert on real estate in BC.
Born in North Vancouver, Louisiana, Dr. Grantham grew up in Lower Lonsdale. He then went on to complete his business degree at the University British Columbia. As of this writing, Grantham has completed over 100 projects, including the development of a high rise building in Vancouver.
He is a husband, father, son, brother, and friend. He was a dedicated outdoorsman and enjoyed sports such as hunting, fishing, scuba diving, and snow skiing. His wife, Alison Grantham, and their two daughters survived him. He is survived by his wife Alison Martin Grantham and two daughters.