Most personal injury lawsuits in the U.S. settle before trial. A prevalent question that our St. Petersburg personal injury attorneys hear from accident victims is whether they have to pay tax on personal injury settlements, and rightly so, as the Internal Revenue Service collects taxes on almost everything.
Most likely, you will not have to part with any of your case earnings. The money you derive from your injury case is generally non-taxable. More information on the various types of settlements and their tax implications.
Do You Have to Report Personal Injury Settlements on Taxes?
The IRS is known to tax any source of income. Gambling winnings are taxable. If you rob a bank, the IRS expects you to include that on your tax return. So, should you include your personal injury settlements in this mix?
Most of the time, any sum that you received from your personal injury case does not have to be mentioned in your income tax return. However, that is, of course, if you were not awarded in relation to damages that are considered taxable.
Physical Injury or Sickness
There is a tax exclusion regarding any damages received for personal injuries or sickness. If you take a settlement related to your injury, and you didn’t claim any tax deduction relating to medical expenses, then you don’t have to declare your settlement as taxable income. Nonetheless, there are some instances where you might pay taxes. For instance:
- If you’ve ever deducted your medical expenses in the past for any tax benefit via the different provisions of a 1040, your settlement, at least in part, may be taxable.
- If you deducted certain medical expenses from your taxable income, that portion of your settlement should be included in your taxable income.
- If you claimed a tax deduction for multiple years, you will pay taxes on this part of your settlement on a proportional basis.
Pain and Suffering
If you suffered mental anguish or emotional distress as a result of the accident that injured you, you may have been awarded damages for pain and suffering. The money you obtain from pain and suffering damages may be taxable income. These damages are treated similarly to compensation for injuries or sickness.
Mental anguish is not considered an injury or illness under Section 104(a)(2). If your pain and suffering did not arise from a personal injury or physical illness, your settlement is taxable. The amount you have to report on your income taxes can be reduced by:
- Related medical expenses you paid for but did not deduct from taxes.
- Medical expenses you deducted for mental anguish if you did not get a tax benefit.
If you report any amount of your compensation for pain and suffering on your taxes, attach a statement to your tax return. Your statement should include your entire settlement amount minus any eligible medical costs you have not deducted yet or expenses you deducted without receiving a tax benefit.
Property Loss
Your personal injury settlements may include money for property damage. For example, if you were in a car accident, your settlement may include funds to have your car repaired or replaced. In general, property loss damages are not taxed. There is an exception to take note of. If your compensation for property loss exceeds your estimated loss of value, the excess amount counts as taxable income.
Punitive Damages
Injuries sustained when there was intentional harm, gross negligence, or a wanton disregard for public safety may, in all likelihood, be punishable. These damages are non-compensatory to you for losses sustained with an injury, but rather intended to punish the defendant. Punitive damages are taxable. Report punitive damages as “other income” as a line item on your tax return.
So it is vital to maximize your personal injury settlements before your case resolves, since your case settlement may or may not be taxable. It can become quite tricky trying to figure out if and when your personal injury settlement may be taxable, especially if you have no clue as to what portion of your settlement pertains to each category. To learn more, talk to your attorney or contact the IRS.
Summing Up!
Most likely, and even some dear friends will sour their sympathy by presenting that long explanation about taxes and the taxability of injury settlements. Rather, consider these over cocktails. One thing, however, is certain. That, the very fact that every settlement may cover medical costs, pain and suffering, property loss, or punitive damages would, in itself, be the modifier determining the very tax regimes applicable to that settlement.
So, stop wasting another second. Contact our trained Jenkins Law personal injury lawyers in St. Petersburg and ensure your claim is pursued and treated with utmost diligence, affording you the utmost financial protection.
FAQ’s Regarding Personal Injury Settlements and Taxes
1. Do I Have To Declare My Settlement to the IRS?
Not always. Settlement for physical injuries or sickness is generally not subject to tax. However, punitive damages and certain types of pain-and-suffering awards may need to be reported.
2. Are Punitive Damages From Personal Injury Settlements Taxable?
Yes. Punitive damages are by definition taxable income and should be reported as “other income” on your tax return.
3. Can Medical Expenses Affect the Taxability of My Settlement?
Yes. If you had previously deducted any medical expenses associated with your injury, that portion of your settlement may be taxable. If you had not taken those deductions, then a settlement for medical expenses is generally tax-free.
