As the old saying goes, the only certain things in life are death and taxes.
Even your hard-won compensation for personal injuries caused by the negligence of another is not completely exempt from taxation.
The whole point of compensation for personal injuries is to compensate you for the damage (injuries or otherwise) you suffer due to the negligence of another. But that does not mean your award will be tax-free. As we will discuss further below, at the end of your case, when you either receive a jury award or finalize a settlement with the opposing party, certain aspects of your award may be subject to taxes.
How legal settlements are taxed is a complex and complicated subject. There are plenty of exceptions to the rules.
So, along with consulting a tax expert, be sure to consult with an experienced personal injury lawyer to help guide and advise you concerning taxes and your personal injury award or settlement.
How Much Tax You Pay, or Whether You Must Pay Taxes, Depends…
One of the most important facts to understand about legal settlements and taxation is that whether you must pay any taxes at all on the money you receive depends on what the compensation is for. In other words, if you are being compensated for pain and suffering, that may be taxed differently than an award for lost wages.
To be clear, it does not matter whether the compensation itself comes to you because of a settlement agreement, or because of a final judgment after trial. Either way, the money you receive may be subject to taxes. Settlements can, of course, afford some flexibility in that they can be structured to take taxes into account. On the other hand, a final judgment is often very clear with regard to taxes and what must be paid.
What does matter is what the award was for.
For example, if the money received was business-related, for example, lost wages, then you can expect it to be taxed as ordinary income.
Interest paid on the compensation you receive may also be taxable.
Because interest payments constitute money that goes beyond mere compensation for your injuries or damage.
According to the IRS, physical injuries or physical sickness caused directly by an accident/incident are not taxed.
BUT that does not include the emotional distress caused by an accident/incident.
Despite the fact that the emotional trauma can manifest itself as physical illness (for example, ulcers) generally compensation for emotional distress will be taxable. However, this is a tricky area because there may be exceptions, such as when the injuries are a direct cause of the emotional distress—so please consult with our experienced team of personal injury attorneys with regard to your specific situation.
Medical bills directly related to the injury caused by the accident are not taxable. Money you receive in a settlement or judgment to compensate you for emergency care, physical therapy, follow up visits, or nursing care, etc. will not be taxed.
In contrast, compensation received for lost wages is taxable. Money you receive to replace lost wages is considered income, thus is taxable.
It can be confusing and difficult to know which aspects of your personal injury legal settlement will or will not be taxed. Let your personal injury attorney and tax experts assist you.
Personal Injury Attorneys Ready to Help.
John Fagan and his legal team are dedicated to helping those who have been injured due to the negligence of another. Contact us here or simply call our firm at: 777-JOHN. We serve clients throughout Florida. Our main office is in Orange Park, but we have consulting offices in Palatka, Middleburg, Keystone, Starke, Gainesville, and Ocala.