How Are Personal Injury Settlements Taxed?

Personal injury settlements are a monumental win for you and your family. After the stress of the injury and court proceedings, a settlement is the light at the end of the tunnel. However, you may not be able to live happily ever after. There are some federal rules and regulations regarding taxation of personal injury settlements. Under federal law, it is illegal for the government to tax any settlement monies received due to personal injury or sickness.

This money is protected under Section 104(a)(2). The only portion of the settlement that can be taxed is any money claimed on your taxes as medical expenses. Settlements that can be taxed include punitive damages, emotional distress and accrued interest. Always remember to consult your personal injury lawyer regarding the settlement specifications.

What Can Be Taxed?

Punitive Damages is money given to an injured party that far exceeds the cost of the injury. The point is to punish the wrongdoer and hurt their pockets. These settlements are often for large sums of money. Therefore, the IRS reserves the right to tax the damages. Emotional distress compensation can only be taxed if it is proven not to be linked to any injury or illness incurred by the plaintiff. For instance, a discrimination or harassment case will cause emotional distress. Damages from these claims can be taxed by the IRS.

Often, injured parties suffer lost wages, pain and suffering, loss of consortium and mental anguish. These damages will remain untouched by the IRS. Supplementary income such as workers’ comp cannot be taxed either. The only other settlement money that can be taxed is breach of contract damages. Even if the breach of contract causes injury, compensation can be taxed.

The court also mandates interest rates on the settlement. This means that the defendant has to pay interest on the settlement amount and that growing interest is taxable by law.

Protect Your Assets – Contact a Personal Injury lawyer

Following up with your settlement taxes can be tricky. We have broken down the rules for you, but many gray areas remain. For instance, medical expenses claimed on your taxes have to be taxed. You may accrue a very large medical bill, and you need an attorney to make sure your taxes are paid in full. You also need to outline the terms in the settlement agreement to legally prohibit any unnecessary taxation of your settlement. It is up to your personal injury lawyer to discuss all legal ramifications with the judge.

The right attorney can make the settlement process go very smoothly for you. The Disparti Law Group has decades of experience regarding personal injury cases. Their expertise will help you get the justice you truly deserve. Our personal injury attorneys are familiar with the nuances of the settlement process, and they will be glad to help you. If you are looking for a trusted attorney in your area, contact the Disparti Law Group today. We gladly serve the Tampa, Chicago and Houston areas.

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