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Q. We invested $25,000 in a fraudulent promissory note and joined a class-action lawsuit to recover what we could. We received a settlement of $5,814, from which the attorney took his fee, leaving us a net settlement of $3,489. To our surprise, we received a 1099 from the attorney stating that we have to pay income tax on the full $5,814.
The entire transaction boggles our minds since we had already paid tax on the money we invested in this note and on the interest we received from the note before it went sour. Is there a logical explanation for all this? We planned to take a $25,000 loss on our tax return, to the extent of the $3,000 allowable each year.
A. You've asked a tough question regarding an issue that confuses a lot of people, including many lawyers. The bottom line is that you should report the settlement on your income tax return. The net effect is a reduction in the amount of the loss you will be able to deduct against other income.
St. Petersburg accountant Jeffrey McClanathan said both the previous loss and the gain from this settlement should be reported on Schedule D of your return. The loss will offset the entire gain and you still will be able to deduct $3,000 in extra losses against your other income. Any excess losses can be carried over to the future. If you claimed your loss in a previous year but are still carrying forward unused losses, you could use them to offset this year's gain.
The really tricky part is whether to report your gain before or after the attorney's fee. Taxpayers in most of the United States must use the gross amount, which is what was reported on your 1099. But federal appeals courts in some districts, including the one covering Florida, have ruled that the attorney's fee is not taxable if the lawyer had a lien against the settlement under state law. Check with your attorney if you are not certain whether your settlement fits this description. If it does, McClanathan suggests that you ask for a corrected 1099 form. If you do not get one, he says you should add a subschedule to your Schedule D showing the gross amount, the attorney's fees you subtracted and the net amount.
If you end up having to report the attorney's fee as taxable income, you probably can include the amount with your miscellaneous itemized deductions.
Whew! You see how accountants and tax lawyers earn their fees.
Q. Where can you find out if you qualify to receive Social Security benefits? Is there a minimum that you have to contribute to become qualified? What is required to qualify for disability benefits?
A. Each type of Social Security benefit has qualifying requirements. For disability benefits, you must have accumulated sufficient work credits, based on your earnings. You can earn up to four credits per year of work. Depending on your age, you might need as few as six credits or as many as 40. There also are rules regarding how recently those qualifying credits must have been earned.
In addition to having qualifying credits, you must also have a qualifying disability. Even though you consider yourself disabled, Social Security might disagree.
Rather than speculate on your eligibility, you should go directly to the source. Here are three ways to get Social Security information: By phone, (800) 772-1213; on the Internet ssa.gov; and in person (look in the telephone book under federal government services for the office nearest you).
Q. How do I find the year-end price for Progress Energy's contingent value obligation? I need it for my intangibles tax return.
A. Progress Energy says the year-end value was 43 cents a share. The best sources of information are your broker and Progress Energy's investor relations department. The security, known as a CVO, trades on the "Pink Sheets" market (www.pinksheets.com).
Online money map
Got a tax question? You may be able to find the answer at Tax and Accounting Sites Directory. Click on "tax topics."
-- Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731.
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