You’ve finally reached a settlement in your personal injury case. You have the check in hand, ready for deposit–but–does any of that money belong to the IRS? For injury victims who have been awarded compensation in a settlement, it can be hard to determine if the money awarded is taxable, and if so, by what percentage.
To be clear, a settlement is an arrangement in a personal injury lawsuit that usually comes after a period of negotiation. A settlement arises when an agreement is reached for the defendant (the at-fault party) to pay a certain amount of compensation to the plaintiff (the injured party).
Knowing whether your injury settlement is taxable could save you a lot of trouble before tax season approaches. Keep in mind that these are general guidelines, so you may want to meet with a tax professional and/or an attorney to discuss your individual case.
How Does The IRS Tax Settlements?
The IRS, or The U.S. Internal Revenue Service, is a part of the federal government which handles the collection of taxes. When it comes to legal settlements, the IRS uses the reason for the original claim as a rule to determine how to tax the settlement money that was paid as a result.
For cases where the reason for the claim was personal injury, settlement payouts to compensate victims are usually not taxed. This could apply to lawsuits involving auto or motorcycle accidents, injuries from negligent security, or slip and falls.
Remember that every case is different and the best way to be sure about how your settlement payment may be taxed is to speak with a tax professional and/or an attorney.
Are Personal Injury Case Settlements Ever Taxed?
Personal injury settlements are usually considered non-taxable, but there are some times when the money must be taxed–and it may depend on the facts of your case. For your personal injury settlement payment to be tax-free, the reason for your claim had to be based on a personal physical injury or a physical sickness.
What exactly is a ‘personal physical injury’? According to the IRS, an injury where there is ‘observable bodily harm.’ This likely means where there is visible bruising or cuts in the skin.
If you were injured in an accident and have questions about settlement taxes, your best option may be to meet with an attorney and/or a tax professional about your case.
Keep in mind that there can be other kinds of claims that are part of personal injury lawsuits (aside from physical injuries) that may give rise to taxable settlements. One example is emotional distress claims, which is not a ‘personal physical injury’. As a result, compensation for emotional distress claims in a personal injury settlement could be taxable.
Here are some other important taxable payments that are often considered as a part of settlements:
- case interest while payment is pending
- punitive damages
- attorney’s fees (if the claim is taxable).
Are Punitive Damages Taxable?
It is not often that a court will award punitive damages to a plaintiff, but it does occur in more extreme personal injury cases. Punitive damages serve the purpose of essentially fining a defendant for especially negligent or malicious behavior.
For this reason, punitive damages can be large amounts of money and are awarded in addition to the compensation paid for the victim’s losses. If punitive damages are added as part of a personal injury settlement, they are usually taxed.
How Can I Know What Parts Of My Settlement Might Be Taxed?
The settlement agreement that is drafted after a settlement is reached can act as a roadmap for how much money in compensation will be paid for each type of loss. Making the settlement agreement thorough and clear could save both parties a lot of time in tax season when they have to determine what parts of the settlement may be taxed and by how much.
Of course, discussing the details of your settlement with an attorney and/or tax professional is the best way to know for sure how your payout may be taxed, if at all.
Who Should I Call?
If you or a loved one was injured in an accident and you have questions about your case, we can help. Our attorneys have experience protecting victims’ rights throughout the claims process, in settlement negotiations, and in trial.
Call us at 813.755.9500 or contact us online to get started with your free and confidential consultation.