Regardless of whether you settled your personal injury claim pre-trial, which is generally 95 to 96% of the case, or at trial, understanding when Uncle Sam takes a cut into your settlement is crucial. You don't want the IRS breathing down your back, especially since not refusing to pay your taxes is a criminal offence. This article will explain what you need to know about whether personal injury claims are taxable.
Compensation Paid Out for Physical Injuries Sustained
For the most part, compensation paid out for physical injuries that have been sustained as a result of the accident are generally non-taxable by both the federal and the state government. In short, the amount that you settled on is what you will be receiving.
You may have to prove to the IRS that the compensation is for physical injuries or sickness. This includes settlements that are meant to compensate you for things like loss wages, emotional distress, medical bills, loss of consortium and even attorney fees.
Exceptions to the Rule
If you settled your case in court, some states may add interest to the final verdict based on the length of time that the case was pending. For example, if it took a year for the case to be finally settled in court, but you did not receive any compensation until two years later because the defendant filed an appeal, the court may award you two year's worth of interest. This additional interest is taxable.
In addition, compensation for punitive damages is also taxable. Your personal injury attorney will generally request the court to separate the final settlement to specifically denote the amount that has been awarded for compensatory damages and punitive damages, so that only a portion of your settlement is taxable.
Taxable Portions of Personal Injury Settlement Claims
Although the settlements are exempt from taxes if they are to compensate for physical injuries, personal injury settlements, where the compensation is emotional distress only, are taxable.
For example, if you filed a personal injury case for employment discrimination, and no physical injury actually arose from the incident, your settlement is taxable.
If you have any questions regarding your settlement, clarify them with a personal injury attorney, like the Law Office of Leslie S. Shaw. Your personal injury attorney will aim to not only help you collect the most amount of compensation possible, but also ensure that only a small portion, if any at all, of your settlement will be taxable.Share