Are Personal Injury Settlements Taxable?
When you are injured in an accident, one of the best ways to cover the associated costs is via a personal injury settlement. Settling with an insurance company or defendant before you go to trial is a good way to ensure that you avoid the headache and hassle associated with a lawsuit.
Accepting a settlement might seem like a simple process. In reality, however, there are some steps you have to take after settling your claim to ensure that everything is handled properly. One of the most important is making sure that you pay all the proper fees owed from the money.
The first fee that you must pay (or that may be automatically deducted from the amount that you’re given is your lawyer’s fee). Most lawyers will charge a contingency fee for helping you settle the case.
After you’ve paid your lawyer, you may wonder if you have to pay taxes to the government for what you receive. There are some important things to consider when determining whether your personal injury settlement is taxable.
How to Figure Out if Your Personal Injury Settlement is Taxable
Generally, the money that you get when you settle a personal injury claim cannot be taxed by the government. This means that most likely, it is not taxable by the federal government or by your state’s government. Federal law says that you do not have to include the money received from a claim in the amount of your annual gross income. This makes sense because the money should cover things like lost wages, medical bills, attorneys’ fees and more.
However, there are some exceptions to the general rule, and there are some cases where the government will tax the money you receive in your settlement. Here are some of the most common exceptions:
- Damages from a breach of contract. If the injury you experienced was caused by a breach of contract, and that breach of contract is the basis of your lawsuit, you’ll have to pay taxes on any settlement money you get.
- Punitive damages. If your lawyer makes a punitive damages claim, then you will pay taxes on the money you receive. You may be able to receive both compensatory damages and punitive damages, and the money you receive for compensatory damages is not taxable by the IRS.
- Distress or Emotional Injury. An injury claim is not taxable unless the injury was physical. If the injury was purely emotional (and did not stem from a physical injury), or if you’re making a claim for distress or mental anguish, then any money that you receive is taxable by the government.
If you have been injured and you want to make a personal injury claim, get in touch with the Smiley Law Firm. Our team of legal experts can guide you through the challenging process of challenging an insurance company so that you can get the compensation you deserve. We can even help you if the insurance company is trying to deny a claim or to give you an unfairly low amount for a settlement. We specialize in people who’ve suffered a car or truck accident, construction site injury, motorcycle or bicycle accident, and more. Our offices are located in Louisiana, Texas, and California.
To learn more about settling your personal injury case, check out our special report The 10 Myths of Settling Your Personal Injury Case, which you can download here.