Will I Owe Taxes on my Personal Injury Settlement?

So you’ve settled your personal injury case, and you pocketed whatever amount is coming to you as your compensation for your damages. But you may have forgotten about one, final bill that you may have to pay from the proceeds of your settlement: Taxes. That’s right, the government may want some money from your settlement.

But the good news is that not all or every part of a personal injury settlement is taxable. In fact in many cases, none of it may even be taxable.

Wages are Taxed

The rule is that any money you receive in a settlement that is considered wages, whether past or future, can be taxed. This makes sense—wages are replacing what you would have made at work, which would have been taxable had you been able to work, so you pay taxes on this money.

Additionally, if you received interest on damages owed to you, that interest is considered extra money, and is taxable. However, in most cases, settlements don’t include any interest payments, so this often is not a concern.

But often, settlements aren’t neatly broken down into lost wages or pain and suffering. The taxable part of your settlement is mixed in with the non taxable part of your settlement. If possible, and if supported by the evidence, you may want to make clear in a settlement agreement that the settlement represents payment for pain and suffering or other non-wage elements of damages.

What Isn’t Taxable?

Any money you get to pay you for medical expenses, now or in the future, is not taxable. That includes any kind of treatment you are compensated for, so long as it is related to the accident.

But often, a large part of a settlement includes non-economic damages; things like pain and suffering, depression, anxiety, PTSD, or fear. If you receive compensation for these kinds of injuries, the money you get is not taxable, so long as the damages flow from, are a result of, or are caused by, a physical injury.

Where there is no physical injury at all that causes or leads to these emotional damages, these kinds of damages would be taxable.

However, given that most personal injury cases are not solely emotional in nature—there is some contact or touching or physical intrusion onto the victim’s body—in almost all cases, damages for pain and suffering and related damages are not taxable.

Note that for certain types of cases, emotional damages could all be taxable. For example victims of sexual harassment at work often receive damages for their trauma, stress, fear or embarrassment. Because there may be no physical impact or touching, these damages would be taxable, in those kinds of cases.

We can help you maximize the value of your injury settlement. Contact the Tampa personal injury lawyers at Barbas, Nunez, Sanders, Butler & Hovsepian and schedule a consultation today.

Source:

irs.gov/government-entities/tax-implications-of-settlements-and-judgments