How Much of a Lawsuit Check Is Available for Your Plans?
The check has arrived. After the wait and uncertainty of a lawsuit, you may finally be able to picture doing something with the money: repairing your home, reducing debt, helping someone, or changing how much you work.
Before you decide, you need to know which amount can support that change. The award, the check in your hand, and the money available for your plans may be three different figures. Understanding the difference helps you avoid counting on the same dollars for both a goal and an unpaid obligation.
Why might the check be smaller than the award?
Legal fees and case expenses can reduce what reaches you. Your attorney’s closing or disbursement statement should explain the payment calculation. For contingent-fee matters, the American Bar Association’s model rule calls for a written statement showing the amount remitted to the client and how it was determined; the rules that apply to your case depend on the jurisdiction.[1]
Use that statement to compare the award with the payment and account for the difference. Don’t guess that every dollar of the difference was a fee or that a deduction was tax withholding. If a line is unclear, ask your attorney what it represents. You need to know what has already been paid before allowing for anything still owed.
Does receiving the check settle the tax question?
No. Federal tax treatment depends on the nature of the underlying claim and what the payment was intended to replace. The award or settlement documents help establish those facts. The word “settlement” does not, by itself, make a payment taxable or tax-free.[2]
Fees deducted before you receive the money do not automatically reduce the amount treated as your income for tax purposes. In taxable recoveries, contingent legal fees can be included in the recipient’s gross income even when the attorney receives that portion directly. Whether any deduction is available is a separate, case-specific tax question.[3]
That is why “I received this much” and “I can use this much” need separate answers. Have your tax professional review the legal documents, payment breakdown, and relevant tax history before relying on an after-tax figure. Don’t assume money recovered for a loss is tax-free without that review.
Three amounts, different jobs
Award
The amount awarded before deductions.
Less: amounts already deducted
Check received
The payment actually delivered to you.
Less: taxes and other obligations still unpaid
Available for plans
The amount you can consider committing.
Base the life decision on this final amount.
The steps above help you account for the differences between the amounts; they don’t predict that every recovery has the same deductions or taxes. Count only obligations that apply to your case. If a cost or tax payment was already taken out, don’t subtract it again. If something remains uncertain, keep that portion out of optional commitments until you have a supported estimate.
What needs to remain available while you decide?
Money set aside for possible taxes has a purpose, even while it sits in your account. Your tax professional should estimate any remaining liability, account for withholding and payments already made, and determine when payments should be made. Some recipients need estimated tax payments during the year; waiting until the return is filed can lead to a penalty.[4]
Match how you hold that money to when you may need it. Funds needed soon for taxes or other obligations should not depend on selling an investment after a market decline. Investment risk and access to the money both matter; a holding suitable for a distant goal may not fit a near-term payment.[5]
Dovetail Principle: Information Should Show What Changes for You
The useful number is the one that shows what the payment changes for you. Account for what arrived and what you still owe, then consider how the remaining money could support the life you want. A larger award does not answer that personal question by itself.
What can you decide once the amount is clearer?
Return to the change you hoped the payment would make possible. Your advisor can help you weigh that goal against keeping some money available for future needs. Before investing, define the money’s purpose and when you expect to use it; those factors help determine appropriate investment choices.[6]
You can explore possibilities while the final amount is being confirmed. Keep a proposed purchase, gift, or change in work separate from a commitment you cannot readily undo. If the available amount is smaller than you hoped, you may need to adjust the size or timing of the goal. If it is sufficient, you can judge the choice using money that is actually available for it.
Let the confirmed amount inform the decision without letting the size of the check make the decision for you.
For more on what to confirm before a tax-related move, read Which Retirement Tax Decisions Need Confirmation Before Money Moves? The companion articles also explore how new money and work choices fit into retirement.
