Should I Expect to Pay Taxes on My Personal Injury Settlement?
Posted on behalf of Gordon & Partners on Apr 10, 2019 in Personal Injury
Personal injury cases are often settled without ever going to trial. A case is considered settled from the moment your lawyer informs the defense attorney that you accept the settlement offer.
However, determining whether or not the money you received from a personal injury settlement is taxable can be tricky. This is because these settlements can be taxable, nontaxable or partially taxable. This is dependent on the specific circumstances of your case and the type of injuries you sustained.
Below, our West Palm Beach personal injury lawyers discuss the exceptions and exclusions you need to know about that could make part of your personal injury settlement taxable. If you were injured and need help pursuing your claim, contact us today to schedule a free, no obligation consultation.
Is My Personal Injury Settlement Taxable?
In most cases, personal injury settlements are not taxable. There are numerous exceptions that can make a portion of your settlement compensation taxable.
A personal injury settlement is not considered wages or salary by the Internal Revenue Service (IRS), but this type of income is considered compensatory. Compensatory does not mean nontaxable – assuming this could leave you owing a great amount of money in taxes.
What Does the IRS Not Consider Taxable?
In a personal injury settlement, the IRS generally deems the money related to physical injuries or sickness as nontaxable. This includes the following types of compensation that are directly related to your injury or illness:
- Medical bills
- Attorney fees
- Pain and suffering
- Emotional distress
- Vehicle repairs
- Rental vehicle reimbursement
Taxable Exceptions to the General Rule
The IRS has rules that prevent you from double dipping with your personal injury settlement. If you have received a tax benefit in the past that is related to your injury case, you may not take it again once the case has settled. For example, if you claimed out-of-pocket costs as a deduction in the past and those costs were included in your settlement, you will need to pay back what was previously deducted.
If your personal injury settlement earned interest, the interest on your award is not exempt from taxation. This interest income must be reported on your taxes, and you will be taxed on it. Interest is often awarded for the length of time it takes a personal injury case to go to trial. It typically starts from the date your case was filed and runs through the date you receive payment on the verdict.
Emotional distress or mental anguish not directly related to your injury or illness is taxable. If your settlement includes compensation for non-physical injuries, these are taxed. This includes compensation for discrimination, wrongful termination, harassment and invasion of privacy.
Compensation for lost wages is typically subject to income tax. This is because your regular income would have been subject to this tax, had you not been injured and were able to work for wages.
Are Punitive Damages Taxable?
Punitive damages are sometimes awarded in personal injury settlements. These damages serve as a punishment for the defendant. Even when directly related to physical injuries or illnesses, this money is most always taxable.
Your attorney should request that the judge separate the punitive damages from the compensatory damages in the award. This allows you to show the IRS that a portion of the award was for nontaxable compensatory damages.
Your attorney should also make sure any liens against you for expenses related to your injury have been paid. Even if you do not know about a lien, you are still required to pay it. Liens related to a personal injury case may be placed by your health insurance company or others for associated debts.
Discuss Your Case with an Experienced Attorney Now
If you have any questions regarding your personal injury case, contact our experienced team of attorneys at Gordon & Partners. We can help you recover the maximum compensation you deserve.
Schedule a free, no obligation consultation today to learn more about your legal rights. We charge no upfront fees and you only pay us if we recover compensation for your case.
Get started today by calling 1 (855) 722-2552 for your free case evaluation.