Are Personal Injury Settlement Checks Taxable?

Posted on June 28, 2022

The answer to the question "are personal injury settlement checks taxable" is answered by the type of damage that will be compensated through a settlement or award.

It is not always easy to answer. It all depends on your individual situation. Therefore, it is important to consult an experienced car accident lawyer who will explain tax obligations related to specific types of damages.

You are not the only one wondering.

The vast majority of personal injury settlements are not taxable

The IRS won't tax any money received as compensatory damages in a suit or jury verdict for personal injuries or physical illness.

The exemption covers personal injury damages including medical expenses, emotional trauma and discomfort, as well as attorney's fees and loss of companionship in certain cases.

In addition to this, the tractor-trailer collision is generally not taxable.

Lost Wages

Most personal injury claims do not include lost earnings.

In some cases, however, lost income might be taxed.

Self-employment income, for example, is often taxed as loss of business income. In most cases, compensation for wages lost in an employment action such as wrongful termination is also taxable.

Workers' Compensation

Workers' compensation benefits are exempt from tax if they do not cover physical injury or sickness.

Loss of Property Value

You will not be required to pay capital gains taxes if your property's value is lower than its adjusted basis.

The excess, if it is greater than the property's adjusted tax basis, is subject to capital gains. To put it another way, the adjusted tax basis of the property will have to be decreased to reflect a decrease in value.

Injuries to the body

According to the Internal Revenue Code (IRC), Section 104(a),(2), compensation for personal injury or sickness are not subject to federal taxes. The federal government doesn't tax settlements or awards resulting from physical injuries.

Another important exception is the fact that you must pay taxes for compensation received for medical expenses , unless you deduct medical expenses from your taxes.

Instances where there are no physical injuries are often taxable. The same goes for portions of personal injury settlements which do not result from physical injuries.

Punitive Damages

As we have already discussed, punitive damages in personal injury cases are taxable as "other income."

There is a narrow exception in some cases. This exception applies if punitive damages have been awarded to an employer in order to punish it for willful and reckless disregard for worker's rights. These benefits are not taxable under IRC Section 104(a),(b).

Loss of Consortium

In certain situations, victims may be eligible to receive loss of consortium damages.

Let's first discuss what loss of consortium is.

Loss of consortium is caused by the "mutual rights of the husband or wife to that affections, solace and comfort, companionship and society, assistance sexual relations, emotional support and love required for a successful marriage".

They are usually not taxable if they cause physical harm or sickness to others.

What are the exceptions?

The IRS's position in settlements and verdicts in cases involving breach of contract that result in personal injury is the same as for all federal tax laws. However, there are some exceptions. Jury awards in settlements arising from breach-of-contract lawsuits are subjected to taxation by IRS, regardless if they were filed separately.

Your lost income claim amount is only after-tax. This means that you will only be eligible for the net amount after taxes of your lost wage claim.

Punitive damages will always be taxed by the IRS. The defendant is penalized with punitive damages. These types of compensation can't be combined with other types compensatory damages. This allows you to easily distinguish between taxable and non-taxable items.

On monies that are settled or won, interest is sometimes paid. The interest rate is usually calculated from the date that the lawsuit was filed to the date that the defendant pays all monies owed. Accounting purposes include any interest received.

You must pay income tax if you receive a settlement or judgment that results from only emotional suffering. It is not taxable if the emotional pain is related to bodily injury or disease.

Let's say you have deducted a portion of your medical expenses due to a personal injury claim. This is a case where the payout should be considered taxable income.

Make sure your Settlement or Verdict is tax-free

In some cases, there may be multiple claims against the defendant. However, personal injury is only one of those. A personal injury lawyer can help you to split any settlement or verdict into individual payments, rather than having it all taxed.

This decreases the chance that the IRS will re-enter and try to tax the entire award.

Beharry Law Firm PLLC, a Miami personal injury law firm, can assist you in your claim and make sure that the process goes smoothly from start to finish.

We will represent you if you have been hurt or damaged by the actions of another party. Beharry Law Firm will do everything to ensure that you receive all the money due.

Contact Beharry Law firm, PLLC if you need legal assistance in a personal injury matter. Our Personal Injury team will assist you in submitting a claim and obtaining a settlement. If necessary, we can also go to trial.

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