How do you avoid paying taxes after winning a large sum of money from a lawsuit?

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Taxes on Large Winnings What the payment is for will determine its taxability. For example, a payment you receive replacing something you lost, such as a car, your home, jewelry, etc., is generally not taxed. Awards and settlements related to personal injury are not taxed. Also, frequently, many of the costs of the lawsuit may be taken against the result and that can substantially change the tax result. (For example, if the attorney is paid a percentage fee or an hourly fee, and who pays for other expenses, are all directly related to who gets the income and or the right to deduct it). These deductions are miscellaneous itemized on Schedule A, and are reduced by 2% of adjusted gross income. Court awards and settlements for breach of contract, most torts, including punitive damages, are generally taxable with the exception of those relating to personal injury.

You should work with a qualified attorney and tax professional to make sure your settlement is structured to minimize any tax liability. If you have already received an award or settlement, then you should consult a good tax professional to advise you. And of course, tax is paid on your entire financial dealings, not just on this one item. So, depending on many other factors, like losses from other sources, charitable contributions, number of dependents and other deductions, you may not end up paying tax anyway.
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