Personal injury settlements are one of the few types of lawsuits that are tax-exempt. Most other lawsuit settlements are taxable. If you recently had a personal injury lawsuit that ended in a settlement, then you’re probably wondering if the Internal Revenue Service (IRS) has any rights to your winnings.
Are personal injury settlements taxable? In most situations they are not.
Typically, personal injury settlements are tax-free at the state and federal level. The reason for this is that you did not earn that money as a form of income through your work. Instead, you earned it by suing someone who wronged you. Assets can be taxed, not liabilities. Personal injury settlements are a liability because they mostly pay back money you’ve already lost.
Factors in a personal injury settlement that are exempt from taxation versus taxable:
- Compensation for emotional stress,
- As well as damages for mental pain, they are exempt from tax if they are related to a physical illness or injury.
- Lost wages, and those related to an injury claim, must be claimed as income.
- Punitive damages are usually taxable when related to a personal injury settlement.
Personal injury settlements are usually tax free
Why is this so and in which cases are they tax-free?
- Compensation for physical injuries or physical illness, defined as “visible physical injury”.
- Dog bite lawsuits,
- Injuries due to a faulty medical device,
- Lawsuits due to whiplash injury to the neck,
- The result of a traditional tort, which means a settlement related to a traffic accident, a slip and fall accident, or some other unexpected injury…
These are all examples and types of cases where the settlement is usually tax free.
Taxable personal injury settlements
Bodily injuries can be defined very broadly: internal damage, disease, infection and subsequent surgical procedures are all examples of physical injuries. Taxation somehow always refers to purely emotional or psychological injuries. If there is no corresponding physical injury, you will have to pay tax on the amount.
There are two other less common situations where your settlement could be taxed:
- Claims based on employment, such as wrongful discrimination, where the settlement is for lost wages or back wages.
- Bodily injuries for which you have already deducted the cost of the injury in the previous tax year. It is possible that these situations will only apply to part of your settlement. For example, if you already deducted emergency room expenses last year, but you haven’t yet removed the surgery expenses from this year.
How much will my tax be on the settlement?
If you are awarded income for emotional distress or punitive damages and not for a physical injury or illness, that money is subject to tax. Taxes are based on the “origin of claims”. Legal fees also affect your income.
How our lawyers can help
An attorney can ensure that you file a claim for all the compensation available to you in an injury settlement. A lawyer can also talk to the insurance company on your behalf.
Don’t let taxes keep you from getting legal representation. This is precisely to the benefit of the insurance company. To ensure that you are not tricked into agreeing to an amount that may sound great at first, always work with an attorney. They can try to convince you to accept a quick tax-free settlement early that only benefits them. Always fight and negotiate for the compensation you deserve.
Contact us!
Nedim Ramic and Bajric & Ramic team of attorneys are here for you. And you should not hesitate to call us today for a free consultation. The time is of the esence. If you find these information above useful, but you have more questions regarding the subject. Or you just need legal help straight forward, give us a call. On 314 352 6800 and get free consultations today!
