Have you experienced an injury due to an accident caused by someone else’s negligence? Are you working to recover a personal injury settlement? If so, you may have questions about the potential taxes related to this type of settlement.
Most people don’t like the thought that filing a personal injury claim and recovering a settlement will cost even more; however, the general answer is no if you will be taxed on your settlement. Unfortunately, it’s not always that easy or cut and dry.
Understanding the tax basics and how they apply to a personal injury settlement is smart. If you have more questions after reading the information here, our legal team at Zimmet & Zimmet is just a phone call away.
The Specific Damages Related to Your Accident and Injury
If you are injured in an accident caused by someone else’s negligence, you will likely experience specific types of damages. Some of the most common include:
- Medical costs
- Lost wages because you can’t work
- Mental and physical pain and suffering
- Permanent impairments and injuries
These damages usually encompass the damages related to most personal injury situations.
The Taxability of Your Personal Injury Settlement
There are different tax rules for each part of your settlement. Your personal injury lawyer can provide more information about these and the personal injury claim process you will go through. Here is a basic overview of the tax laws for different payments that come from your personal injury lawsuit.
- Medical costs: Many personal injury accidents result in high medical bills; however, none of the settlement amounts you receive for these costs will be taxed. This includes any medical costs related to your ongoing or immediate care.
- Lost wages: The amount of compensation received for lost wages and hours from work is taxable. This is just like they would be if you received them from actual hours worked.
- Pain and suffering: Compensation for pain and suffering is a bit trickier. Usually, the compensation received for pain and suffering related to your accident and injuries isn’t taxable. It’s considered aligned with your compensation for medical costs and beyond tax liability. However, emotional pain and suffering are beyond the bounds of compensation for physical injuries and, therefore, may be taxed.
- Punitive damages: This is money awarded in situations where especially egregious negligence is present and punitive damages are used to punish the at-fault party. The payment is beyond physical damages and, therefore, may be taxed.
- Interest: If you receive interest on any part of your settlement, it is beyond the strict realm of compensation and probably taxable.
As you can see from the information here, personal injury claim payouts and the tax implications are complicated.
Other Settlement Options That May be Taxed
Along with the ones listed above, like lost wages, interest, and punitive damages, other portions of your personal injury settlement may also be taxed. These include:
- Invasion of privacy: This isn’t directly related to the costs you incur from an injury and, as a result, will be taxed.
- Discrimination: This may cause lost wages and make it a form of compensatory income, which means it is taxable.
- Harassment: This is only taxed by the IRS related to the injury you suffered. However, if the case of harassment resulted in an injury or emotional distress, it probably won’t be taxable. This is determined on a case-by-case basis.
- Wrongful termination: This is considered lost wages and therefore taxed.
- Defamation: Usually related to lost income and taxable income.
Tips to Ensure a Non-Taxable Personal Injury Settlement
If you have a personal injury lawsuit filed, hiring an injury lawyer is highly recommended. They can provide more advice and information about your case, settlement, and if any portion of it will be taxed.
Understanding the taxable portion of the settlement is important to know what you can and can’t keep when you receive your payment.
Contact Our Legal Team for Help and Information
At Zimmet & Zimmet, we are ready to help with your personal injury claim. We will help you get a settlement through personal injury mediation or by going to court. Our goal is to help you recover the compensation you deserve and ensure that you get to keep as much of the settlement amount as possible.
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