Personal Injury Lawyer
Tax season can be stressful for many people, but for a person who has suffered an injury and received a personal injury settlement or award, there may be a concern about paying a large amount in taxes based on the settlement.
Generally speaking, money received as a result of a judgment or settlement is not taxable as gross income. This is because these funds are considered to be received by the injured person as compensation. Therefore, sums received to pay for medical care and other associated costs which directly address the underlying loss are not taxed.
However, funds awarded as a punishment to the defendant, that is, punitive damages, are taxable because they do not directly affect the injured party’s loss. Another notable exception is for funds received for lost income or wages because the injured party’s regular income or wages would have been taxed.
Federal Taxes
Under federal law, whether or not you pay taxes on compensation received depends on the kind of injury sustained and on what the compensation is based. Compensation that stems from physical injuries or sickness is generally not taxable depending on whether or not the taxpayer previously deducted their medical expenses. If a person receives compensation for emotional distress as a result of a physical injury or sickness, the funds are not considered taxable income either.
It is possible for an injured party to figure out which portion of their settlement or judgment is subject to tax based on the paperwork associated with the verdict or settlement. The jury or parties to a settlement are clear about how much money is awarded for each category of claims. Therefore, there is little guesswork involved in determining how much tax may be due. A personal injury lawyer can assist you in understanding his paperwork.
Note that if the parties to a settlement try to allocate a large amount to address injury claims when it is clear that this is done to avoid paying a larger amount in taxes, the IRS may still allocate any funds reported as part of the settlement but not claimed as income to the taxpayer’s income and tax them accordingly.
When you have received a settlement and are unsure as to how the new income will be taxed, it is important to consult a tax professional to ensure that you comply with both federal and state tax laws.
Contact a Personal Injury Law Firm Today
An experienced personal injury lawyer can help you pursue for damages you may be entitled to for the losses your injuries have caused, including medical expenses, lost income, and pain and suffering.
If you have been injured in an accident, do not speak with the at-fault party’s insurance company without obtaining legal advice. Call an experienced attorney, like a personal injury lawyer from a law firm like Therman Law Offices, LTD.
