Ask the tax adviser
much tax is due on a lawsuit award and getting the appropriate tax
break for donating a car.
How much tax on lawsuit
Dear Tax Talk:
What percentage of taxes do I pay on money received from a car accident
lawsuit? Is that tax percentage taken from the awarded amount or
from the amount received after the lawyer's one-third and accrued
Money recovered under a car accident lawsuit would generally consist
of two components: 1) damage to the vehicle and 2) payment for physical
injuries, including maybe lost wages. Both components are generally
tax-free. The portion that is intended to pay for damage to the
vehicle is generally the cost of the repairs to the vehicle.
Under the principles of involuntary conversion,
recoveries or insurance reimbursements for damaged property are
generally not taxable, provided that the amounts recovered are spent
to repair the property. If the amounts are not spent to repair the
damaged property, the amount recovered would still not be taxable,
if it does not exceed the cost of the property damaged.
Amounts recovered for physical injury are not
taxable, even though part of the settlement may be designated for
lost wages. If the recovery includes punitive damages, then the
portion that is punitive is taxable.
Since the recovery in the car accident lawsuit
is tax-free, the attorney's fees are not deductible nor would they
be income. Recent tax case law has held that in situations where
the recovery is taxable, the portion retained by the attorney is
included in income of the taxpayer. The fees would then be a miscellaneous
itemized deduction subject to reduction by 2 percent of adjusted
Further, this treatment could cause the taxpayer
to fall into the alternative minimum tax since miscellaneous itemized
deductions are not deductible for the AMT. Therefore, before accepting
a settlement that may be taxable, you should review the tax consequences
to possibly restructure the attorney's fee arrangement or estimate
the taxes due on the settlement.
Getting the most from a car
Dear Tax Talk:
What are the rules for donating a car? I keep hearing different
interpretations of the tax laws, and the Internal Revenue Service
information is not easily understood.
My car is worth about $2,500 wholesale blue
book and $4,600 retail. Can I deduct the full amount or only a portion?
A contribution of property to a charitable organization provides
you with a charitable contribution deduction equal to the fair market
value of the property donated. Fair market value is defined as the
amount that a willing buyer and seller would agree on where neither
party is under a compulsion to buy or sell.
Wholesale bluebook value or trade-in values
assume that the buyer is under a compulsion to accept the car and
therefore a discount is provided by the seller. Whereas retail value
assumes that neither party is under a compulsion to accept the deal
at the stated price. Therefore, as a starting point in determining
the value of the vehicle, I would use the retail value and adjust
it appropriately for mileage and accessories and its current mechanical
condition and appearance.
If the value of the car exceeds $500, you must
complete Internal Revenue Service Form
8283 at the time that you file your tax return. If the value
of the car exceeds $5,000, IRS regulations require that you obtain
an appraisal to be submitted with your tax return as well as complete
additional information on IRS Form 8283. In this case, Form 8283
requires that the charitable organization sign such form acknowledging
receipt of the property. Therefore, I recommend that you have the
organization complete the acknowledgment at the time that you make
the gift to avoid delays in filing your tax return.
You also can check out Bankrate.com's story
vehicles if you'd like to read more.
-- Posted Oct. 27,