Can a Personal Injury Settlement Be Taxed?
If you are involved in an accident that leads to injury, you may be eligible to receive compensation via a personal injury claim. This may occur after a car accident or a fall at work. After a personal injury claim has reached a settlement, most people just want to get their money and get back to their lives. In the best circumstances, they simply wait for the money, minus lawyer fees. However, Uncle Sam often gets involved to tax as much from the settlement as possible. In this article, Liljegren Law Group will discuss the various tax liability issues you may face as they apply to your personal injury settlement.
Compensation for Injury Non-Taxable
In most cases, money you receive from a personal injury claim is non-taxable under state and federal laws. This applies to cases settled before or after filing a lawsuit and to verdicts that award compensation. Federal law specifically exempts compensation received from such claims from a person’s gross income.
The key principle used in determining if your compensation is ineligible for taxation is what you are being compensated for. These settlements are meant to pay you for lost wages, medical bills, distress, pain and suffering, and attorney fees. Because all this income is awarded because of your injury, they are all non-taxable forms of income. This also applies for those that became sick by way of negligent behavior at work, such as being exposed to a germ.
Exceptions to Non-Taxable Rules
There are circumstances in which compensation from a personal injury claim can be taxed. If, for example, a breach of contract causes your injury and that breach is the basis of your claim, any damages awarded or agreed to in settlement are taxable under the law.
Money awarded as punitive damages is always taxable. Lawyers often request the court separates the punitive and compensatory damages for this reason. This gives proof to the IRS that one part of the damages is non-taxable when you file your taxes.
Another section of compensation that the government can tax is called interest on the judgment. In most states, a court can add interest onto an awarded compensation for cases that drag on for an extended period. This income, which is meant to motivate the parties to move quickly through the lawsuit, is taxable by the government.
Emotional Injury Claims
Compensation for damages is only non-taxable only for physical injuries. A claim for compensation for emotional injury is not exempt from taxes. However, if a personal injury, even a slight one, is connected to the claim, the damages are exempt.
Maximize Your Compensation
As many claimants often have multiple claims against a defendant, it’s important you make sure a settlement agreement declares which compensation is personal injury, particularly when that claim is much larger. By doing this, you guarantee you have the evidence you need to fight the IRS, which may challenge your payout’s non-taxability status.
To learn more about your personal injury claim, we at Liljegren Law Group recommend consulting with a legal professional to help you find all the answers you need.