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For example, payments made to compensate a plaintiff for actual damages or harm caused by the defendant's action generally are deductible. However, some settlement payments or legal fees may be characterized as capital expenses if they are incurred in connection with the acquisition of a capital asset.

Most settlement proceeds get the same tax treatment as ordinary income. You should receive a 1099-MISC from the insurance company that paid the settlement and should add that to your tax return in the appropriate box. Lost wages may result in a W-2 tax form for reporting purposes.

Key expenses no longer deductible include those related to investing, tax preparation, and hobbies. Gambling expenses are deductible, and the threshold for charitable deductions increased.

The costs associated with hiring attorneys, defending a case, and paying for damages or a settlement can be exorbitant, and damage a company's profitability. The good news is these payments are generally tax deductible business expenses.

Generally, deductible closing costs are those for interest, certain mortgage points and deductible real estate taxes. Many other settlement fees and closing costs for buying the property become additions to your basis in the property and part of your depreciation deduction, including: Abstract fees.

Legal fees that are deductible In general, legal fees that are related to your business, including rental properties, can be deductions. This is true even if you didn't win the legal case in which the legal fees were incurred.

Allocate damages to reduce taxes: During settlement negotiations, you can negotiate to allocate a larger portion of the settlement to non-taxable award categories. For example, increase the award related to physical injuries and illness and decrease amounts related to emotional distress.