I just bought a home. What can I deduct from the settlement statement?

If you bought your home, you probably paid settlement or closing costs in addition to the contract price. These costs are divided between you and the seller according to the sales contract, local custom, or understanding of the parties. If you built your home, you probably paid these costs when you bought the land or settled on your mortgage.

The only settlement or closing costs you can deduct are home mortgage interest, points that represent interest and certain real estate taxes. You may, deduct them in the year you buy your home if you itemize your deductions. Real estate taxes are usually divided so that you and the seller each pay taxes for the part of the property tax year that each owned the home.

You add certain other settlement or closing costs to the basis of your home. You include in your basis the settlement fees and closing costs that are for buying your home. A fee is for buying the home if you would have had to pay it even if you paid cash for the home

There are some settlement or closing costs that you cannot deduct or add to the basis of your home. These include fees and costs that are for getting a mortgage loan. For more information refer to Publication 530, Tax Information for First Time-Homeowners, and Publication 936, Home Mortgage Interest Deduction.

References:

• Publication 530, Tax information for First-Time Homeowners
• Publication 936, Home Mortgage Interest Deduction

I received damages for emotional distress suffered as a result of employment discrimination. Is the money I received taxable?

Emotional distress is not considered a physical injury or physical sickness; therefore, damages for emotional distress are includible in income except to the extent they are paid for medical care attributable to emotional distress.

References:

• Publication 525, Taxable and Nontaxable Income
• Tax Topic 422, Nontaxable Income
• Revenue Ruling 96-65

Because of my age, my employer wanted to terminate my employment. I signed a statement not to sue and received a lump-sum payment from my employer for age discrimination. Is this payment taxable?

A lump-sum payment for cancellation of your employment is taxable income in the year you receive it and must be reported with your other salary and wages. This is true even if the payment was received (by suit or agreement) as settlement under the Age Discrimination in Employment Act.

Refer to Publication 525, Taxable and Nontaxable Income, for more details.

References:

• Publication 525, Taxable and Nontaxable Income
• Tax Topic 422, Nontaxable Income
• Revenue Ruling 96-65 and Commissioner v. Schleier, 515 US 323 (1995)

Is the money received from my settlement taxable?

For court awards and damages, to determine if settlement amounts you receive by compromise or judgment must be included in your income, you must consider the item which the settlement replaces. Include the following as ordinary income:

Interest on any award.

Compensation for lost wages or lost profits in cases other than those where the payments are for wages lost as a result of physical injury.

Punitive damages. (But see below)

Amounts received in settlement of pension rights (if you did not contribute to the plan).

Damages for: (A) Patent or copyright infringement. (B) Breach of contract. (C) Interference with business operations.

Any recovery under the Age Discrimination in Employment Act.

Injury to your reputation .

Alienation of affection.

Do not include in your income compensatory damages for personal physical injury or physical sickness (whether received in a lump sum or installments).

Damages for emotional distress due to a physical injury or physical sickness are not taxable.

Punitive damages are taxable. It does not matter if they relate to a physical injury or a physical sickness.

For additional information, refer to Publication 525, Taxable and Nontaxable Income, or Tax Topic 422, Nontaxable Income.

References:

• Publication 525, Taxable and Nontaxable Income
• Tax Topic 422, Nontaxable Income