When you are part of a class action lawsuit, you could receive an amount of money when it settles. Although it’s tempting to spend the money on something fun or frivolous, that isn’t always a great move. Instead, take steps to make sure you meet your obligations and plan for your future. Here are some ideas to consider.
Prepare for Taxes on Your Class Action Lawsuit Settlement
In most cases, you will owe taxes on your class action lawsuit settlement. The IRS usually views the money as income. This classification leads them to tax it according to your bracket. Not only is the award taxed, but so can certain additional items. For instance, your attorney fees that are are part of the settlement. However, you may be able to deduct the value of the attorney fees if you itemize your taxes.
The only exceptions to the requirement to pay taxes tend to be settlements for physical injuries, though emotional distress can potentially qualify as well. However, for emotional distress, only a portion will be tax-free, typically an amount equal to the cost of any related medical treatments, like counseling sessions.
If you aren’t certain how your tax liability will change after receiving money from a class action settlement, consult with a tax professional to make sure you are ready to handle the cost.
Consider Your Future Needs
At times, the situation that led you to join a class action lawsuit can come with long-term consequences. If the circumstances leading to the suit could leave you dealing with issues down the road, setting aside some of the money to address them could be a great decision.
For example, the Equifax data breach exposed the personal information of around 148 million people, including many Social Security numbers. As a result, the risk of identity theft for these individuals will remain high for the remainder of their lives. If the class action lawsuit settles, setting aside money for identity theft protection services may be wise.
Now, not all situations that lead to a class action lawsuit create long-term consequences. In those cases, you won’t need to worry about setting aside any cash for that purpose.
Secure Your Financial Future
After you handle the two points above, you may have cash left over. While spending it on something frivolous or fun may be tempting, it is better to use it to enhance your financial well-being or future.
For example, paying down high-interest debt is nearly always a good choice for any windfall. Using the money to start or supplement your emergency fund should also be on the table. Also, consider bolstering or starting your retirement fund, saving for college for yourself or your child, making home or vehicle repairs, or other options along those lines.
If you use the money to prepare for an emergency or another unexpected event, it can provide financial security. Remember, life is rarely predictable, and financial hardship can happen, so committing the money to safeguard yourself and your family is a great priority.
Use a Little to Relieve Stress and Have Fun
If being part of a class action lawsuit left you stressed, then spending a little of the money on something you enjoy can restore a sense of well-being. However, since most class action lawsuit settlements are split up among a lot of people, you don’t want to go overboard.
Instead, think of something small that brings a smile to your face. You could treat yourself to a dinner out, purchase a new outfit, or even start a vacation fund. Just make sure that you focus on the areas above first and resist the urge to blow it all on something you don’t need. There aren’t many financial windfalls in life, so make sure to use yours wisely.
Have you ever received a class action lawsuit settlement? Share how you handled the money in the comments below.
Read More:
- Managing a Financial Windfall
- Don’t Spend Your Tax Refund on These 7 Things
- Top 3 Ways to Spend Your Tax Refund Check
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Tamila McDonald is a U.S. Army veteran with 20 years of service, including five years as a military financial advisor. After retiring from the Army, she spent eight years as an AFCPE-certified personal financial advisor for wounded warriors and their families. Now she writes about personal finance and benefits programs for numerous financial websites.
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