How is an insurance class action settlement taxed?

When you prepare your annual income tax return, you'll need to address certain tax consequences from getting a monetary settlement. It would be best to ask your accountant or tax consultant if you have any questions on how to treat your particular settlement proceeds.

Usually, anything other than the proceeds of a life insurance policy to which you're a beneficiary is considered to be taxable income. Several options may be offered to policyholders who are eligible for compensation in a class action lawsuit.

For example, three "relief choices' were offered to policyholders by Prudential Insurance Co. These choices were only offered to policyholders who were eligible for its class action settlement.

Two types of "basic claim relief' and a refund of premiums (with interest) were the choices that were offered. In each choice, there could be taxable money involved.

The premiums are not subject to taxes, but the interest would be if you opt for a return of premium with interest. Until you've received more money than you paid in premiums, distributions from a life insurance policy are not taxable for other settlement options.

You are going to need an Internal Revenue Service (IRS) From 1099 if you received insurance lawsuit settlement money.

This form shows the amount of money you received and from whom. Earned gross income (money which taxes have not been deducted) will be reported in several types of 1099 forms.

A miscellaneous income might be applied on a 1099MISC Form. The total amount that you received will be shown on a 1099MISC form. An accompanying letter from the insurer is what you should be looking for later.

This letter should include how much is interest, other settlement benefits, and how much of your settlement is a return of your premium.

You can either figure out yourself what premiums you've paid into the policy or call your insurance company and have them evaluate this information for you. You should do this if you don't get a letter that breaks out the amounts. You should bring this information to your tax preparer.

Another form that you can receive from your insurance company is the 1099INT Form. This form will list the interest payment on your premium that you received. You should bring this from to your tax preparer because it is probably subject to income taxes.