Personal Injury Settlements Taxable
Personal injury settlements are generally not taxable. However, some exceptions apply. For instance, if you receive punitive damages as part of your settlement, the government could tax those funds. Also, if you collected interest on your settlement, the Internal Revenue Service (IRS) may tax those proceeds, as well.
Your injury settlement should account for your injury-related losses. When you consult with a lawyer from our firm, you can learn more. The Law Offices of Wolf & Pravato can examine your options today. Dial (954) 633-8270 to get started.
Understanding Tax Law and Your Personal Injury Case
Under Internal Revenue Code (IRC) Section 61, all income is taxable––with a few exemptions, of course. Per IRC Section 104, these exemptions include any damages recovered from injury claims or lawsuits. Yet, every situation is different.
For instance, if you recover millions in damages, this would affect your financial standing. You would have to report these changes to the IRS, and it could tax some of those proceeds after evaluating your situation.
Are My Damages Taxable in a South Florida Personal Injury Case?
Under federal law, some parts of a personal injury settlement are not taxable. This primarily focuses on any damages caused by physical injuries or related to them. This covers most parts of your typical car accident settlement, including:
- Medical bills
- Physical pain and suffering
- Emotional distress caused by physical injuries
This can get confusing, though. Some injury-related losses are taxable. For example, you generally pay taxes on your income. So, the IRS could tax any compensation related to your lost income.
However, under IRC Section 104, certain circumstances prevent the IRS from taxing your settlement or court award. Your attorney or a Certified Public Accountant (CPA) can explain your potential tax implications based on your situation.
Some Parts of Your Payout May Be Taxable
While most parts of a personal injury settlement are not taxable, some parts are. As noted, the IRS may tax any compensation related to:
Punitive damages are almost always taxable. Punitive damages are not common in personal injury cases. Only the courts award these damages.
The purpose of punitive damages is to penalize the liable party for their intentional, particularly negligent, or otherwise exceptionally bad behavior. They are not compensatory damages, meaning they do not pay for your injury-related expenses. Instead, punitive damages’ value depends on the other party’s conduct. As such, these damages do not meet the exception in IRC Section 104 and are usually taxable.
One example where this occurs frequently is in defective drug, device, or product mass torts. Punitive damages may be substantial in these cases. Recipients could pay taxes on a multi-million dollar punitive award.
Deducted Medical Expenses
In many cases, injuries occur in one year, and the case does not settle until the next. When this occurs, the injured party may opt to deduct their related medical expenses from their taxes in the year the incident occurred. When this happens, the IRS could tax the money received to cover those expenses.
If you do not deduct any of these expenses on your tax return, the IRS cannot tax them.
Lost Income in Some Situations
As noted, the IRS may tax the cost of your recovered income. After all, you normally pay taxes on your income when filing your yearly taxes. The IRS views reimbursement for lost income in a similar light.
Can My Creditors Garnish My Personal Injury Settlement?
You reasonably want as much money as possible after suffering harm. You already know that the IRS can tax parts of your personal injury settlement. Now, you may wonder whether your creditors can garnish your settlement. Again, that depends on your situation.
For instance, suppose you owe child support payments. The government could order a percentage of your settlement to account for those debts. However, it cannot take more than a certain amount.
This is what makes considering legal help crucial. When you partner with an attorney from our team, we can evaluate all aspects of your situation—including whether your creditors can garnish your wages. We can also protect you from unlawful practices that jeopardize your financial resources.
What Can I Recover Through a Personal Injury Settlement?
The types of damages you can recover through legal action depend on your situation. For instance, if you suffered life-altering injuries, you could pursue compensation for disability. If you need help supervising your child during your recovery, you could recover childcare costs.
Recoverable damages in your case may comprise:
- Medical bills
- Lost income and other job-related earnings
- Pain and suffering
- Scarring and disfigurement
- Property damage expenses
- Any out-of-pocket injury-related loss
Your Fort Lauderdale personal injury lawyer will do everything in their power to secure what you need. They will also determine what losses are tax-exempt and what losses are not.
Connect With a Personal Injury Lawyer in South Florida Today
At the Law Offices of Wolf & Pravato, our Florida personal injury attorneys will review your case. We can also determine your next steps, a potential path to financial recovery, and how your settlement could affect your family’s finances. We can also answer your questions related to your personal injury case, such as whether it’s taxable. Call (954) 633-8270 to get started with your complimentary consultation with one of our attorneys.