Personal injury cases and negligence cases are paid by the insurance of whoever is at fault. In the article Is Your Personal Injury Settlement Taxable, we have discussed the taxability of specific settlement money that you can receive.
To recap, we have concluded the following:
Medical Expenses are not taxable.
When examining the information available from the Internal Revenue Service (IRS), we can see that individuals will not have to pay taxes on any compensation they receive for their medical expenses through a settlement of a personal injury jury verdict. This includes monies they recover for emergency medical bills, physical therapy or rehabilitation, prescription medications, and any long-term ongoing medical needs.
Other Out-of-Pocket Expenses are not taxable.
It is not uncommon for individuals to recover compensation for their out-of-pocket expenses related to the incident. This can include costs for them to travel to and from medical visits, costs to rent vehicles if the incident caused vehicle damage, payment to individuals to come to the house to help with household services, and more. All of this includes expenses that an individual would otherwise not have had if the incident had not occurred. Compensation for these out-of-pocket expenses will not be taxed.
Pain and Suffering are not taxable.
Individuals are often able to recover compensation for both physical and emotional pain and suffering experienced as a result of the injuries, the recovery process, and a loss of quality of life. Pain and suffering compensation can be significant, depending on the severity of the injuries. Again, the IRS will not tax compensation individuals receive for pain and suffering losses after an injury occurs.
Lost Income is taxable.
This is where the IRS and state revenue departments will begin to collect taxes on part of the settlement. Individuals who recover lost wage compensation will need to pay taxes at the regular rate based on how much they receive. This makes sense because this is meant to be a replacement of wages that an individual would otherwise have been making and paying taxes on. It is imperative to work not only with a skilled personal injury attorney for help recovering compensation but also with a tax attorney if you have any questions about how to pay taxes on this portion of your settlement or jury verdict.
Punitive Damages are taxable.
In rare cases, individuals are issued punitive damages along with the compensatory damages mentioned above. Punitive damages are reserved for situations where the defendant in the case, the person who allegedly caused the injury, was grossly negligent or intentional in their actions. These are damages that punish the defendant and send a signal to others that this type of behavior is not acceptable. Punitive damages can be taxed by the IRS.
What You Need To Remember
It is clear then that the type of settlement that you get from a company can be taxed by the IRS depending on where they are meant to be paid out.
Generally, income that would otherwise still be received by the person injured is taxable. This would include your wages and income that you have lost because of the accident.
Let us provide you with an example:
A contractor was tasked to remodel a kitchen. In the course of the remodel, the contractor fell because he was not informed that the specific part of the kitchen is slippery and unsafe. For his settlement money, he received payment for his medical expenses, for the moral damages he suffered, and he also received payment for his lost income for the 6 months that he was unable to work.
His medical expenses and damages are not taxable but the lost income or wages are taxable.
If you are having some concerns about the taxability of your settlement money, we are here to help.
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The article that you have read is based on general applications of the law. It is not legal advice and it is not to be construed as any legal consultation with the firm. No client-attorney relationship is created when you read the articles we have provided.
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