What to do with the money from a Legal Settlement and is it taxable?

What to do with the money from a Legal Settlement and is it taxable?

November 07, 2020

What to do with the money from a Legal Settlement and is it taxable?

  • You just received word that you are the recipient of a legal settlement
  • Your attorney is happy to notify you that you have a legal settlement check waiting for you
  • You might be asking yourself what do you do now with this legal settlement money?


Definition of a legal settlement: A settlement is an agreement that states no one is guilty however, both parties want a resolution, and they want to move on without going to court.

 What kind of legal settlements are there?

  • Divorce settlements
  • Damage awards
  • Class action lawsuit settlements
  • Employment-related legal settlements
  • Discrimination settlements
  • Disability settlements


Questions to ask about legal settlements:

When do you decide to sue?  Most will say it depends and it is certainly the million-dollar question that attorneys and those wronged in some way will ask.  

How do you make the decision that the amount offered is the value of the damage suffered?  How much longer can you wait for settlement or court? 

Usually the lawsuit ends at the death of the person who can sue.

This can take years my family went through the process that took 8 years to resolve.

 Is your legal settlement taxable?

After going through all the decisions, you then get the settlement money. It is sent to your attorney, then they get their percentage or what you owe your attorney, and then you get the rest.  You need to make sure that most of the settlement is not taxable or that some of it is not taxed.

Punitive damages are taxable

Health deductions you took must be declared as income the year you receive the settlement.

Personal injury and medical is usually not taxed

Making decisions about a legal settlement can be very complicated and you do need to get guidance.  Contact your Tax Professional or Meyers Financial Services, Inc., to help you through this step.

Now you have paid the Tax authorities and you are left with the rest.  What do you do with this money that has given you instant wealth?

Like all the others on my blog after getting through the emotional side of the issue now you need to decide how to best distribute what is left.

What to do with the money from a legal settlement:

  1. Start an emergency fund
  2. Pay of debt
  3. Buy a car
  4. Share with family
  5. Donate to your favorite charity
  6. Buy a home
  7. Buy new cloths
  8. Travel 


Find someone who can help you through this decision. Meyers financial services, Inc., is here for you to make good decisions about your money.


Book a Call today and let’s discuss your options.

About the Author:

Lillian Meyers CFP®, CDFA®, EA is a financial planner in Sonoma, California helping clients with wealth events, planning for retirement, loss of a spouse or divorce. She has decades of experience assisting clients in living their best retirement life through the use of financial planning, investment management, and other sophisticated financial options.