Tax Regulations of a Personal Injury Settlement

Personal Injury Settlement

Amid rising personal accident cases in the US with a reported 55.4 million injuries in 2020, it is imperative to understand the tax regulations associated with such accidents. Personal injury expenses pose a tremendous burden on the whole family. No victim looks forward to navigating the complex worlds of medical care, physical rehabilitation, and prolonged litigation. And on top of all this, tax concerns may prove very stressful. Personal injury lawyers at Wagoner Desai are happy to provide clients with important insights and professional direction at every step of their case, from the first factual inquiry to the distribution of settlement funds.

Are Settlements from Personal Injury Cases Subject to Taxation?

Personal injury settlements are one of the few forms of litigation that are not subject to federal income taxation. A percentage of most other litigation settlements must be paid up to the Internal Revenue Service (IRS). If you win a personal injury lawsuit, the settlement money you receive might be deducted from your taxable income by the Internal Revenue Service. Both one-time and recurring payments are exempt from the tax deduction requirement.

There are pros and cons to tax-free vs. tax-deductible personal injury settlements.

  • Emotional suffering and mental agony resulting from physical illness or damage are exempt from taxation.
  • Even if a personal injury case results in the loss of earnings, it must be reported as income.
  • Taxes are usually levied on punitive damages in personal injury cases.

Taxable Punitive Damages

Injuries, medical costs, and other expenses are all covered by compensatory damages in the form of cash granted to the sufferer. The IRS distinguishes between compensatory and punitive losses when it comes to tax relief. Compensation damages aim to compensate for a loss someone has experienced.

Those who engage in deliberate, negligent, or reckless conduct that results in harm or death may be awarded punitive damages. Punitive damages are intended to penalize the wrongdoer, not to make up for the harm suffered by the victim. Aside from compensation payments, they are regarded unusual.

If a personal injury results in death, a wrongful death lawsuit is brought by the surviving family members. Medical costs, burial costs, and inheritance loss costs may be covered by the opposing party on the court’s direction. The court may even ask the other side to pay families for the victim’s mental anguish and physical discomfort before death.

Settlement Amounts Subjected to Tax in Certain Circumstances.

Injured parties should be aware that the state or federal government may tax some or all of their compensation in certain circumstances. If punitive damages are sought and obtained in an injury action, that sum will be clearly defined as different from compensatory damages and will therefore be taxable. Money judgment or settlement awards may also be taxed on the interest accrued on the judgments or settlements. As a consequence of the opposing party’s choice to appeal, the plaintiff may face significant delays in receiving the money they’re owed if their appeal is unsuccessful.

Contact a Personal Injury Lawyer!

If you’re worried about the taxes you’ll owe on your settlement, working with an experienced lawyer may put your mind at rest. Wagoner Desai has the expertise to ensure that your case goes as smoothly as possible.


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