Do Personal Injury Settlements Count as Income?
Personal injury settlements can come as a huge relief to many people. It can feel like all the efforts that have gone into proving you were wronged have come to fruition. As a general rule, personal injury settlements will not count as income and will not be taxed. But like all other rules, there are exceptions here as well. You must be aware of the taxable and non-taxable components of your personal injury settlement. This will help you file the claim in the right way to ensure a significant portion of the amount becomes non-taxable. Let us look at what components of your personal injury settlement can be counted as income.
Generally, any amount you receive as a part of a personal injury settlement may not be taxed by the government under any federal or state law. Whether you went to trial and won a verdict or got the amount of the claim in an out of court settlement will not affect this. This is because Federal tax law excludes any damages received by an individual for physical injuries from his/her gross income. The same applies to claims received after a physical sickness as well. For instance, if you have been exposed to a bacteria or virus due to someone else's ignorance and fell ill, then you can file a personal injury claim, and the amount you get as a settlement for that claim will not be taxed.
Like all other laws, there are exceptions here as well. Some of them include:
Breach Of Contract
While most of your personal injury income will not be taxed by the government, a claim for breach of contract can be taxed.
For instance, if you fell ill or suffered a physical injury due to a breach of contract, then that breach becomes the basis of your lawsuit and not the injury itself. In such situations, you will be taxed for the settlement you get due to this contract's breach.
The government always taxes punitive damages. If your personal injury claim includes a punitive damages component, then your lawyer can request the judge to separate the claim into a compensatory claim and punitive damages. This way, you can prove to the IRS that part of the amount you received was compensatory damages that cannot be taxed.
Interest of Judgment
Another portion of your personal injury amount that will be taxed by the government is interest on the judgment. Many states in the US require that interest is added to the verdict for the length of the case. For instance, your case began in March 2018, and you won in April 2018. But the defendant disagrees with the verdict and refuses to pay till April 2019. Then interest will get accumulated on the verdict amount for that entire period. This interest will be considered extra income and will be taxed by the government.
Emotional Injury Claims
Any amount you get from a personal injury claim will not be taxed only for physical injuries. If you receive an amount for damages caused due to emotional or mental trauma, then the IRS will consider that amount as an income, and you will have to pay taxes on it. The only way to save this is by proving even the smallest physical injury in the claim.
Wrongful Termination or Unlawful Discrimination
Suppose you have filed a personal injury lawsuit for wrongful discrimination at the workplace or wrongful termination and win the lawsuit. In that case, any amount you receive will be considered taxable income. This especially applies to the amount given towards any income that you lose due to the termination. This will come under employment tax, and you will have to pay taxes on that amount. Similarly, if you get any settlement for any losses that you may have incurred in your business due to discrimination, a part of the damages that fall under your net-earnings will be considered to fall under self-employment tax. And hence, you will have to pay taxes on it.
Loss of Wages or Loss of Income
The government will tax any claim awarded to compensate for the loss of income or wages due to injury or suffering. You will have to report it on your tax return.
Loss in Value of Property
Any property settlements for loss in your property's value will not be taxable as long as they are less than your property's adjusted basis. You will not have to report it on your tax returns. However, if the settlement is more than the adjusted basis, the additional amount will be considered income. You will need to declare it and pay tax on that excess amount.
Ensure As Much of Your Claims Is Non-Taxable
While a part of your personal injury claim may be taxable, it is possible to save taxes on it. You need to be well-aware of what components are taxed and what is not in your claim. Sometimes, there may be overlaps in the type of claims, and you may be confused about what to do. At such times, a good personal injury attorney will be of immense help. The attorney can guide you on filing the claim so that you don't pay too much in taxes.
Get Legal Advice
Legal and tax-related rules always come with exceptions, and you may not always understand these exceptions. It is best to take the legal advice of an experienced attorney like Flagler Personal Injury Group in Miami to help you file your personal injury claim correctly.
We will do an in-depth analysis of the tax implications of your settlement and guide you accordingly. If required, we will negotiate favorable terms for the settlement. Our team has handled a number of personal injury cases and has years of experience with negotiations. We will go through all the details and do our best to ensure the larger part of your settlement is non-taxable. You can check out Flagler Personal Injury Group here.