Have you been awarded a settlement in a personal injury lawsuit for your severe car accident injuries? Now that you have your money, you may be wondering are personal injury settlements taxable? The last thing you need is to get in trouble with the IRS because you missed a necessary tax payment.
Most personal injury proceeds are not taxable either under state or federal law. It also doesn’t matter if you settled before filing the lawsuit or after, the settlement is still probably not taxable. It also doesn’t matter if the award was decided between the two parties and their attornies or awarded by a jury or judicial decision following a trial.
The general rule when it comes to personal injury settlements is that the Federal government will not tax any damages that were received because of physical sickness or personal physical injuries. These are not included in the gross income of a taxpayer.
The reason for this is that personal injury damages are considered as compensation for such things as pain and suffering, emotional distress, medical bills, lost wages, attorney fees, and loss of consortium. These monies are not to be taxed as long as they are compensating for a physical sickness or personal injury.
A physical sickness is defined as one that occurred because of the negligence of another. For example, if a person is exposed to something that made them sick, damages recovered would not be taxable.
There are some exceptions to this general rule. If you receive damages that were a result of an injury caused by a breach of contract, they may be taxable if the breach of contract is why you filed a lawsuit.
If you receive punitive damages, they will be taxable. Your attorney should always ask the jury or the judge to separate any damages into punitive and compensatory awards. This means you can prove to the IRS that part of your award is not taxable.
If you have received a tax benefit on anything that relates to this case, your new settlement may be taxable. A good example is if you take a deduction for your out-of-pocket medical costs on your tax return, the monies awarded as part of the personal injury settlement for these costs will be taxable.
For the most part, any monies you receive as part of a personal injury settlement will not be taxed. It is best to check with your accountant or your lawyer to determine if you need to pay taxes on any of the monies you receive.