Your case’s financial award may result from either a court verdict or an out-of-court settlement. When submitting your taxes, ask yourself, Is a personal injury settlement considered income? There is no easy yes or no answer for this one.
This is a difficult query because the Internal Revenue Service (IRS), governing settlements and taxes, has set up rules. Settlements are treated by the IRS as several payments instead of one lump sum. The settlement’s rationale will help to decide its taxability or lack thereof.
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Compensation for Personal Injury Might Take Several Forms
Taxable, non-taxable, and both.
Generally, non-taxable are most personal injury settlements resulting from physical injuries you have not deducted on a past tax return. If the bodily injury brings about psychological distress, the emotional damage will also be non-taxable. If a worker is hurt and becomes depressed as a result of not being able to work, they may be reimbursed since the mental pain was directly caused by their physical damage.
Though this is generally true, the IRS is ultimately responsible for determining if your settlement qualifies for non-taxable income based on the specifics of your case.
Which Elements of a Personal Injury Settlement Might Be Taxable?
The specifics of your situation will affect taxation.
Think of the IRS’s categorization and the most often used settlement elements. They will decide their tax status.
Taxable Income and Medical Expenses
Two guiding principles help one decide whether a settlement is tax-deductible.
1) Usually, settlements for physical injuries and diseases resulting from personal damage are non-taxable. The IRS taxes them exclusively in cases of intended income replacement.
Your personal injury settlement is considered income and is subject to taxes if you have previously claimed medical deductions for the injury or disease leading to your tax settlement. This is because you already asserted that expense on a previous tax return.
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The Court Can Impose Punitive Damages
A jury or judge sets punitive damages to penalize a defendant for egregious behavior or injury. Taxes almost always have to be levied on punitive damages.
Particularly in instances that have been much publicized, judges often give punitive damages. When judges notice a pattern of hurtful, unacceptable behavior in the community, they impose punitive damages.
Taxation is applied even if a physical damage or ailment produces or correlates with punitive damages. Under the other income heading, tax returns include punitive damages.
Ensure your lawyer looks at the settlement to facilitate filing. Compensatory damages are meant to replace losses suffered as a result of another person’s actions, whereas punitive damages are intended to punish a wrongdoer for their actions.
Imagine you invested all or part of your settlement money. Usually, interest is subject to taxation.
Emotional Distress
Also known as mental anguish, it is the suffering brought on by a traumatic event, such a physical damage. If it pertains to the settlement, the award will be taxable.
Usually, if physical injury directly causes you mental anguish, the compensation you get is not taxable. Under these circumstances, the court could handle emotional suffering as the rest.
On a Personal Injury Settlement, What Tax Should I Expect to Pay?
Your settlement might be taxed totally or partially. For tax reasons, you should report the following as “ordinary income” to the IRS.
- Settlement sum interest
- Emotional anguish not connected to physical damage
- Attorney fees where gross income serves as the basis for compensation
- Giving damages for claims besides injury, such as a contract breach
Consulting a personal injury attorney is essential, as some of your settlement could be taxed without your knowledge. The lawyer will guide you through all pertinent matters and help to reduce your tax load.
Tax Advice for Personal Injuries
These tax-saving strategies will help you decrease your taxes. Think about what you want to get before the settlement, and jot down your settlement details — especially if any part of your personal injury settlement considered income. This way, you and the IRS will share a clear picture of your taxable income.
Following the settlement, ignore any accolades based on physical damages.
- One might divide the settlement over a protracted period. On some taxable components of the settlement, you can reduce the tax liability.
- Talk to a professional about the investments you make with the settlement’s money.
- Contact the IRS if needed. You can avoid fines by knowing your tax responsibilities.
Bottom Line!
If you are hurt personally, you do not have to pay large fines. To prevent future tax issues, especially when determining if a personal injury settlement considered income, you should speak with a lawyer and a knowledgeable tax accountant before or after you receive compensation from your settlement. An attorney and a tax accountant can help you negotiate this difficult situation.
Tax consequences of a personal injury settlement may be difficult to negotiate; making the incorrect decision might be costly. Don’t gamble your financial future, whether you are haggling over a settlement or have already been compensated.
Talk with an expert personal injury attorney who knows how to protect your settlement and reduce your tax burden by contacting Tenina Law right away. To guarantee your rights are protected from beginning to end, our team will work hand in hand with you and your tax expert. Set up your free Tenina Law session right away and get the peace of mind you deserve.
