Compensation from Class Action suit

Isn't it supposed to be compensation for some injury that you and the other zillion plaintiffs suffered at the hands of the defendant?

If so, that doesn't sound like income to me.

R's, John

It's really impossible to tell without more information. Generally, as you say, a recovery will be a return of capital or repayment for some non-deductible loss. But if the loss had been deducted, or was for lost profit or the loss of something else that would have been taxable if it had been received by the class members, it would be taxable as a lawsuit recovery as well. ___ Stu

Sorry I was not more specific. The $5000 was for participating as a plaintiff, not compensation for the harm to me that the suit was about.

I think it you do it just once and don't spend too much time on it as a job, then Line 21 Other Income, otherwise Schedule C income which makes it subject to self-employment tax of 15.3% or so. The logic seems similar to business versus hobby, which is described at

No, you received compensation for the harm the suit was about.

The nature of the harm determines whether the compensation was taxable. If the harm was anything other than physical injury or physical illness, the compensation was taxable. Based on facts you haven't provided, if the compensation is taxable it could be either as ordinary income or capital gain.

Whether the compensation is taxable or not depends upon the nature of the "injury."

Right. In my answer I assumed the poster was paid to show up and testify. If he received money from the the result of the lawsuit then I agree with your response. Medical payments are tax-free. I suspect other reimbursements are tax-free too. The fees you paid to bring about the lawsuit may be deductible too, and if it is for a racism lawsuit it is deducts from your AGI.

In the class actions with which I am familiar including one in which I was the lead plaintiff (but we lost, so nobody got anything), one or two people act as lead plaintiffs, with the theory being that their claim against the defendant is typical of the claims of the class members.

When the suit is won, or more typically, settled, the lead plaintiff invariably gets more than the other class members, but less than the lawyers. So as other people have been saying, it depends on what the nature of the suit is. Lead plaintiff's aren't experts, they don't get paid for their time.

R's, John

Not necessarily. I suppose it's possible that he could have been paid simply for his services being the named plaintiff in a class action suit, in addition to whatever he would receive as part of the class. In that case it would all be taxable earned income.

Again, not necessarily. If it was to pay back for an overpayment, say, or to compensate for a similar loss, it would not be taxable.

___ Stu

I'm still operating on the premise that the OP's "compensation" was his share of the settlement from the law suit.

I agree that if the $5,000 was a refund of an overpayment he made, then it would be excludible to the extent he had not deducted that overpayment on an earlier tax return. Note that if the payment were for a depreciable asset, his basis in that asset would be reduced by the portion excluded from taxable income.