Is My Personal Injury Settlement Taxable?

You might think a personal injury lawsuit ends at the resolution of the case. Even after you achieve a successful settlement, however, you must deal with the complications of tax liability. Come tax time after receiving a settlement, you may have to hire a professional to help you fulfill your financial obligations to the Internal Revenue Service (IRS) and state. A Kansas City personal injury lawyer or certified tax professional can help you work through civil claim settlement taxation in Kansas City.

Compensatory Damages Are Generally Not Taxable

The bulk of most personal injury settlements are not taxable. Neither the state or federal government taxes compensatory damages, or awards meant to reimburse a victim for his or her losses. Compensatory damages can include physical injuries, illnesses, medical bills, lost wages, loss of consortium, emotional injuries, property repairs, and pain and suffering. Compensation to repay legal fees and attorney’s costs are also nontaxable.

You will typically not have to pay taxes on your lost wages since you will receive an amount that already deducts what you normally would have paid in taxes for the hours worked. Your weekly wage reimbursement will already have the taxes removed. If you receive an amount equal to a paycheck before taxation, however, you may have to pay taxes on the sum as you would have had you gone to work regularly.

In most scenarios, the money you receive to compensate you for losses suffered is not taxable. Once you pay your attorney’s fees and medical providers, you can walk away with the remainder of your settlement without giving a portion to the IRS or state government. However, exceptions to the rule exist. Some personal injury settlements are taxable or partially taxable depending on the types of awards granted.

Taxable Parts of a Personal Injury Settlement

A settlement purely for damages associated with a physical injury or illness will generally be exempt from tax liability. If you deducted any costs associated with your injury or illness on a previous tax return, however, you may have to pay taxes on that portion of the settlement. Otherwise, you would be receiving double tax benefits for the same settlement. If you spent $50,000 in medical expenses and listed this as a tax deduction one year, for example, you may have to pay taxes on the $50,000 when you receive a settlement for it the following year.

Another part of a settlement that may be taxable is a pain and suffering award if not in connection with a physical injury or illness. If you filed a claim for emotional damages only, without an accompanying physical ailment, any settlement you receive could be taxable. The IRS does not have a tax exemption for nonphysical injuries. Receiving a settlement for something such as wrongful termination, contract disputes, discrimination, invasions of privacy, or only pain and suffering could lead to tax liabilities.

You will also have to pay taxes on any part of a settlement attributed to punitive damages. Punitive damages, awards meant to punish defendants, are always taxable under federal law. Your attorney will generally ask the judge to separate punitive damages from compensatory ones in the verdict. That way, you will have documentation to show the IRS which damages are taxable and which are exempt. Finally, any part of your settlement classified as interest will be tax liable.

Get Tax Assistance During Your Claim

One of the many reasons to hire an attorney for a personal injury case is to help you work through tax liabilities. It is in your best interest to have someone work out the details of settlement taxation before you receive your check. Your lawyer can request the separation of your settlement at the verdict stage to minimize taxation, as well as to make paying your taxes easier. A lawyer can help you understand which parts of your settlement will be taxable and how to fulfill your tax responsibility as a claimant in Kansas City.


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