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John Bair
John Bair
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The Tax Hit You Might Not Be Expecting After the Kentucky Derby

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The first Saturday in May is approaching, and fans of the Kentucky Derby are already looking at the top contenders for this year. For those who are lucky enough to bet on the winning horse, the payout is big. Last year, the Kentucky Derby purse was $2 million.

are winnings taxable

Winning would surely be a life changing moment. But it’s important for people who take home money at the races to know that the IRS will take a cut of that lump sum. That realization might feel similar to what plaintiffs experience when they win a lawsuit that’s taxable.

Thankfully, there are a few options for plaintiffs who obtain a settlement so they can lighten the initial tax hit. A person’s gross income does not include damages received in a lawsuit over personal physical injuries or illness (aside from punitive damages). However, cases that do not involve injuries can result in a major financial blow to the plaintiff come the next tax season. These taxable lawsuits commonly involve issues including sexual harassment, discrimination, fraud, and intellectual property. Without proper planning, a plaintiff could pay thousands of dollars to the IRS after receiving his or her settlement.

Those with a taxable settlement can work with a comprehensive settlement planner to establish a non-qualified assignment (NQA). An NQA is a structured plan to make future payments to the plaintiff using portions from non-injury settlement money (more on this planning approach here). An NQA affords the opportunity to plan the receipt of income each year while also spreading the tax burden over time (instead of getting taxed on a lump sum settlement).

Unfortunately for those who win big at the Kentucky Derby, payment strategies are not available. Instead, it’s important to speak with an accountant and set aside the IRS’s cut for tax time.

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