Taxable income is a complex area and one that needs to be understood to some degree, especially if you’ve come into a personal injury settlement. The damages you’ve been awarded, if unaware it should have been taxed, can cause a lot of stress and trouble for you later on.
No one expects you to have the same knowledge as a taxation attorney, but knowing how to handle any personal injury settlements you’re being awarded can help you budget the money better and avoid disappointment in the amount kept, let alone avoid trouble with the law.
Types of Non-Taxable Personal Injury Compensation
Generally, damages received as part of a personal injury settlement aren’t taxable by law and are considered to be excluded from gross income when it comes time to file your taxes. Whether your personal injury compensation is paid out in a lump sum or consists of periodic payments, the rule holds true.
While it’s true that your personal settlements aren’t usually considered taxable, it’s important for you to know what specific kinds won’t be taxed by the government:
- Dog attacks or bites
- car accidents, for only physical injury
- medical malpractice, only for physical illness
- property liability, injury resulting from building or property neglect
- workplace injury, including construction
- product liability, injury resulting from a flaw in a car for example
- defective medications, side effects that cause injury
- wrongful death
- Emotional distress/mental anguish, only if linked to physical illness or injury resulting from the actions of the defendant
Each of these falls under the umbrella of personal injury and is usually considered non-taxable. It’s also important to note that the IRS does draw a line between compensatory and punitive damages. Compensatory damages are meant to compensate the plaintiff for their suffering while punitive damages are given as a punishment to the plaintiff. Usually, punitive damages are taxed. Though, it’s always a good idea to consult a tax attorney or an accountant on these situations to be sure as it isn’t a firm rule or law.
What is Taxable by Law?
It was touched on in the previous section, but better to explain more in-depth regarding what types of personal injury settlements are considered taxable, even if only related to the case:
- Damages will be taxed if it is related to a breach of contract, even if that breach resulted in a physical injury or illness.
- Punitive damages, as mentioned earlier, are always taxable. Your personal injury attorney may request that the court separate the verdict into compensatory damages and punitive damages, which will give you more non-taxable money.
- In some states, a court may assign interest to the verdict in your personal injury case. The interest would begin when the case was filed and proceed until your first payment is received. The interest is taxable.
- Emotional injury damages are taxable unless they came from a physical injury. An example of this kind of case is employment or housing discrimination.
As always, if you have concerns regarding the damages you’ll be receiving, talk with your personal injury attorney or a tax lawyer to better position yourself with the IRS.
When to Pay Tax on Personal Injury Compensation
There is no separate time to report personal injury settlements to the IRS, they would be reported when filing a tax return like any other kind of income. Though, to help cut down on taxable damages your personal injury attorney may be able to structure settlements with the defendant. The IRS typically doesn’t interfere in agreements made in a lawsuit, even if the agreement is related to tax issues and tax liability.
Marken Personal Injury Attorney
Here at Marken Law Group, we’re familiar with how tax law can affect your settlement payments and the damages you’re awarded. We have extensive experience in personal injury cases and to better help our clients through this stressful time, we don’t charge fees unless we are successful in your case. We understand how stressful it can be to navigate a personal injury case and don’t want to add any more stress during a difficult time. We have represented hundreds of claimants in Washington, Idaho, Montana, Oregon, and California to help our clients get what is rightfully theirs. We focus on your individual needs and bring our professional experience to help guide you through.
Partner with an experienced ally that is by your side from start to finish and can help you retain what was rightfully awarded to you.
We look forward to fighting for you.