When individuals are pursuing financial compensation for an injury through a personal injury lawsuit, a common question tends to arise. What happens at tax-time with any monies recovered through civil litigation?
Ultimately, the answer is…it depends. There are multiple factors that affect if/how personal injury settlements will be taxed:
The type of damages obtained
Whether certain medical expenses have already been deducted from taxes that relate to the bodily injuries endured from the accident
Whether or not there is an award for punitive damages
When is Personal Injury Compensation not Taxable?
The proceeds from a personal injury settlement or jury verdict are not subject to state or federal income taxation, as a general rule. However, this general exclusion from taxation only applies to the compensation you receive as restitution for the expenses incurred as a result of your injuries.
For example, if you have $20,000 in medical expenses from the treatment you received following a personal injury incident and are awarded $20,000 from a personal injury settlement you are being reimbursed for those expenses and not receiving any additional financial gain.
When is Personal Injury Compensation Taxable?
Since personal injury cases can include a variety of non-physical losses, including lost wages and emotional distress, there are times where an award can be subject to taxation. Like we’ve covered, the general exclusion for taxing personal injury settlements applies to the monies received to compensate you for those expenses directly related to treating an injury. However, if you receive other forms of compensation as a result of a personal injury lawsuit, those additional funds could be subject to taxation.
For example, if you have a personal injury claim for $20,000 and an additional $20,000 for lost wages, when a settlement is reached the compensation that is not directly related to the bodily injury (lost wages) will need to be claimed on taxes.
Contact Kwartler Manus Today
It is imperative to speak to not only a knowledgeable personal injury attorney but also consult a licensed tax professional for case-specific taxation. Contact us online or by phone at (267) 214-8608 for a complimentary consultation in order to discuss your specific situation.