Do You Have to Pay Taxes On Your Personal Injury Settlement?
Monday, January 22, 2018, 6:00 PM | Leave Comment
Personal injury settlements can come from any number of sources. You may have been involved in a car crash, been a victim of assault and battery, or suffered an injury in a hospital due to the negligence of a nurse.
In all these instances, you can file personal injury lawsuits that will allow you to recover damages for your injuries. These claims can be filed with the insurance agency, and at times, the claim will go all the way to court to be presided over by a judge or jury.
The types of compensation you can earn from personal injury lawsuits are varied; you can receive restitution for medical bills, lost wages, damaged property, emotional distress, and punitive damages.
There is often confusion regarding these monetary amounts, however; people may not know if the income is taxable or not. They are usually concerned that the amount they are promised will not be what is actually given to them due to the required money that is taken out.
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Physical Injury and Taxes
Simply put, personal injury compensation that arises from physical damages is not taxable. As long as the awards are related to the injury, you cannot be taxed on it. For example, let’s say you were involved in a crash with Uber.
As a result, a number of effects happened: you suffered neck pain and a broken leg, your car needed extensive repairs, you were forced to miss work for weeks, and you developed a fear of driving on the freeway.
All of the ensuing damages would be a direct result of the crash (medical bills for your neck pain, repair costs for your vehicle, reimbursement of lost wages, and compensation for your emotional distress) and the injury you sustained. The physical injury part is the most important aspect of determining whether or not your income is taxable.
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Exceptions to Non-taxable Damages
There are some cases where the income you receive from a personal injury settlement is taxable. The most common is the presence of punitive damages.
These are damages that are handed out in the event of gross negligence or the intention to cause harm, as in the case of assault and battery claims.
These damages are purely additional forms of compensation meant to punish the defendant and dissuade him from committing the same or similar actions in the future to another individual.
The damages are usually viewed as excessive, however, and as a result, many juries will not support or award them.
Punitive damages can always be taxed. Fortunately, lawyers will often request that these damages be counted separately from the others, as they serve a different purpose – they are not direct compensation for your injuries.
As stated before, the presence of physical injr.ies is what largely determines taxability.
Some claims do not yield physical injuries but result in high levels of emotional distress. Again, consider a car accident with Uber, but consider instead that you were not physically harmed and only developed anxiety while being chauffeured around and acquired PTSD, whereupon seeing a similar car would trigger a negative emotional response.
These emotional or noneconomic damages are taxable by the IRS.
Further, if you receive damages that are awarded based on employment discrimination or something similar, these damages will likely be taxed. This is due to the fact that the most common form of compensation is wage-related, and employment discrimination or harassment may not have accompanying physical injuries. Instead, you will likely be reimbursed for lost wages from both the future and the past.
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Common Misconceptions
The most important part of taxable income from a settlement, as stated, is the presence of physical damage. This is also true in workplace accidents that result in injuries. Individuals usually believe that injuries sustained while on the job affect their taxes in some way; this is not true. Injuries are of no concern to the IRS.
This misconception is quite common, especially with rideshare drivers. Attorneys at this Uber accident law firm have reported that a lot of their clients who drive for Uber will request some form of proof, whether as an affidavit or otherwise, to show the IRS that they were, in fact, injured while at work, even though they are technically working as independent contractors.
This is unnecessary: their settlement income will only be taxed if their damages are not the result of physical injuries. Provided you were harmed in an Uber accident, your regular income taxes will not be affected, and the settlement you earn will not be reduced.
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Legal Fees
The legal fees that are accrued during your case may also be exempt from taxes. This is because these fees count as damages related to your injury. In many cases, attorneys will receive a percentage of the total settlement value.
If your case does not include a physical injury, you will have to pay taxes on those fees as well.
The IRS has a guideline that you can follow that outlines the settlements and what can be taxed.
Specifically, it states that any legal or attorney fees that can be attributed non-taxable settlements (as in those stemming from physical injuries) are by extension not taxable.
Awards that have interest accrued by the court, on the other hand, are always able to be taxed. There are statutes in some states that require interest to be paid, and the type of case or injury has no bearing on the taxability.
