The answer to this question is complicated and depends on your individual case. In general, the proceeds you receive on account of your physical injury or physical sickness are not taxable by local, state or federal governments. This applies to the personal injury damages, including medical costs (if not previously deducted on your tax return), emotional distress, pain and suffering, and lost wages.
However, if you received compensation for a breach of contract, you could pay taxes. Also, punitive damages, which could occur in a personal injury lawsuit, are subject to taxes.
Finally, it is important to note that lost wages received in an employment-related context are taxable. Further, certain discrimination suits can have tax consequences.
What is a Structured Settlement?
Most personal injury settlements are lump sum payments, meaning you receive one payment for your injury claim. In some instances, placing some or all of the settlement in a structured settlement is beneficial.
Unlike lump sum settlements, structured settlements consist of smaller payments over time. Part of the settlement can to the plaintiff immediately and, then, the rest is structured over several years and slowly paid out for a fixed period of time or even a lifetime. In the event of the injured party’s death, the remainder of the original settlement amount is paid to the estate. There are advantages and disadvantages of structured settlements.
Some plaintiffs can earn more money over time with a structured settlement, and this additional money is tax-free. A structured settlement could also cost insurance companies much less than paying one large payment depending upon the terms of the settlement. Your personal injury attorney will guide you toward the settlement structure that is best for you and your case.
While the settlement belongs to the injured party plaintiff, some external parties may have a claim to the settlement too. For instance, certain health insurance plans have language that requires a person to reimburse their health insurance company for the amount that was paid on medical bills associated with the injured party’s care. Also, if you have unpaid medical bills, certain medical providers may place a lien on the settlement, requiring those costs to be paid back. Finally, institutions like Medicare and state-funded Medicaid will also be entitled to reimbursement. Because the consequences of failing to pay these external parties back can be dire (including the loss of your benefits, collection agencies, or lawsuits), it is important to seek the guidance from an experienced personal injury attorney to make sure that you are protected. For instance, there are certain procedural tactics that can be used to decrease the amount of money you must pay back.
Understand Your Personal Injury Settlement
Every personal injury settlement is unique, and your attorney is the best source of information regarding your case. It’s critical you have an attorney you trust in your corner. The team at Wendt Law Firm, P.C. is here to help our clients understand their case and their settlements in Kansas City. We want to get you the compensation you deserve and help you understand your rights.