Have you been injured in a car accident or some other type of personal injury case and received a settlement check?
Do you know whether the settlement is taxable? The answer to this question can vary depending on your situation.
While it’s critical to contact a personal injury attorney as quickly as possible to talk about all aspects of your case, the following is a summary of when personal injury compensation and settlements are taxable.
The type of damage being compensated by a settlement or award determines the answer to this question.
The answer is not necessarily straightforward. It depends on your situation, so it’s essential to speak with an experienced personal injury lawyer who can explain the tax obligations associated with specific types of damages.
But, if you have been wondering this, you are not alone.
In fact, one of the most frequent inquiries we receive at Rose Sanders Law Firm, PLLC, is whether or not you have to pay taxes on a personal injury settlement.
The IRS will not tax you on any money you received as compensatory damages in a lawsuit or jury verdict for personal injury or physical sickness.
Personal injury damages, including medical expenses, emotional trauma, discomfort, suffering, attorney’s fees, and loss of companionship in some cases, are all covered by the exemption.
In addition to this, the state of Texas does not impose personal income taxes and does not tax personal injury settlements or judgments. This means if your settlement or judgment is taxable, it will only be federally.
Pain and suffering, emotional trauma, and mental anguish are not taxed, provided they stem from a personal injury or sickness.
So, unless deducted as a medical expense, mental anguish damages caused by an Uber accident or a tractor-trailer accident are generally not taxable.
If you suffer mental anguish from someone defrauding you in a business transaction (which is recoverable in Texas) the associated mental agony damages are generally taxable as “other income.”
In most cases, your lost earnings in a personal injury claim are not taxable.
However, in some circumstances, your lost income may be taxed.
For example, self-employment income is frequently taxed as lost business income. Compensation for lost wages in employment actions like wrongful termination is typically taxable, too.
In the case of workers’ compensation, benefits for physical harm or sickness are not taxed.
If your property’s market value is less than its adjusted basis, you will not have to pay capital gains taxes on the difference.
If it is more significant, however, the excess is taxed as a capital gain. In other words, the property’s adjusted tax basis will need to be lowered for it to reflect decreased value.
The IRS’ Internal Revenue Code (IRC) section 104(a)(2) states that compensation paid “on account of” personal injury or sickness is not subject to federal taxation. This means the federal government does not apply taxes to settlements and awards stemming from physical injuries.
Another important exception is that you must pay taxes on compensation received for medical expenses only if you deduct the medical expenses from your taxes.
Settlements in instances that do not involve physical injuries are frequently taxable, as are portions of personal injury settlements that do not originate from the physical injuries or sickness.
As discussed above, in many personal injury claims, punitive damages are taxable as “other income.”
In some instances, a narrow exception exists. The exception is available if punitive damages are awarded to punish an employer for its willful and reckless disregard of a worker’s rights. In this case, these sorts of benefits can be non-taxable under IRC section 104(a)(b).
In some situations, a victim may be eligible for loss of consortium damages.
First, let’s discuss what loss of consortium means.
Damage caused by the “mutual right of the husband and wife to that affection, solace, comfort, companionship, society, assistance, sexual relations, emotional support, love, and felicity required to a successful marriage” is loss of consortium.
When physical harm or sickness causes loss of consortium damages, they are typically not taxable.
The IRS’s position on settlements and verdicts in breach of contract cases that result in personal injuries is the same as all federal tax laws: there are certain exceptions. Settlement or jury awards from breach of contract lawsuits are subject to taxation by the IRS, regardless of whether you filed them separately.
The amount you will receive for your lost income claim is also only after-tax. In other words, you are only eligible to receive the net post-tax amount of your lost wage claim.
The IRS will always tax punitive damages. Punitive damages are awarded as a penalty to the defendant. These sorts of compensation aren’t generally given in combination with other types of compensatory damages. This makes it simple to differentiate taxable from non-taxable items.
Interest is often paid on monies gained in a settlement or verdict. The interest rate generally starts on the date the lawsuit was filed and ends on the date the defendant pays all of the money owed. Any funds received as interest are included in income for accounting purposes.
If you get a settlement or a judgment resulting from purely emotional suffering, you must pay income tax on it. If the emotional pain is linked to bodily harm or disease, however, it is non-taxable.
Suppose you deducted any part of your medical expenditures due to the personal injury claim in previous years. In that case, that portion of the payout must be treated as taxable income.
There may be multiple claims brought against the defendant in some instances, only one of which is for personal injury. If that’s the case, a personal injury attorney can help to break down any settlement or verdict you earn into separate payments for each claim rather than being taxed as a whole.
This reduces the possibility of the IRS re-entering and trying to tax the entire award.
Rose Sanders Law Firm, PLLC is a personal injury law firm in Texas that can help you with your injury claim and ensure the process runs smoothly from beginning to end.
If you suffered any harm or damage due to someone else’s actions, we will fight for what’s right on your behalf. You can rest assured knowing that Rose Sanders Law Firm is doing everything possible to get you all of the money owed.
If you require legal assistance regarding a personal injury case, contact Rose Sanders Law Firm, PLLC. Our Personal Injury team can assist you with submitting a claim, obtaining a settlement, and going to trial if necessary.
Do you know whether the settlement is taxable? The answer to this question can vary depending on your situation.
While situations vary, the IRS will generally not tax you on any money you received as compensatory damages in a lawsuit or jury verdict for personal injury or physical sickness.
Personal injury damages, including medical expenses, emotional trauma, discomfort, suffering, attorney’s fees, and loss of companionship in some cases, are all covered by the exemption.
There are many types of damages, and certain exceptions apply. For example, settlement or jury awards from breach of contract lawsuits are subject to taxation by the IRS, regardless of whether you filed them separately.
If you require legal assistance regarding a personal injury case, contact Rose Sanders Law Firm, PLLC.
