Does a Tax Apply to Personal Injury Settlements?

Originally published by Bob Kraft.

Does a Tax apply to Personal Injury Settlements?

No one likes to take the matters to court, either it is the insurance companies or parties engaging in an accident. This is because a lot of money adds up to the overall expenditures as you’re required to pay court fees and hire the services of professional attorneys. Therefore, people like to arbitrate their cases outside the court. Once you have agreed to a suitable sum, all your attorney needs to do is inform the defense attorney about you agreeing to the proposal. This could be done either via emails, phone calls, fax, or a letter.

Once you have got your money, you should be entitled to all of it after paying the charges of your attorney. But, this isn’t the case here in the US, as you’re charged with a suitable ratio of tax on your personal injury claim money.

Physical Injury Claims are Nontaxable

According to both the federal and state laws, you don’t need to pay anything to tax authorities from a personal injury claim. Regardless of the way you have received your compensations (either it’s been through court or from arbitration outside the court) no tax is levied on your settlement money, in most of the cases. This suggests that personal injury claims for medical bills, lost wages, loss of consortium, pain, and suffering, and attorney fees aren’t taxed. Physical injuries include bruises, cuts, broken bones, and amputations whereas physical sickness involves getting sick either from germs or anything else, and in all these compensations no tax is charged.

For instance, if there is a breach of contract that caused your accident, then your damages will be levied with tax ratios. Similarly, the tax is levied to punitive damages as well. If you are making a punitive claim, then you will be required to pay an optimum amount of your money to the tax authorities. In the case of a punitive damage, your attorney should always separate the punitive damages from compensatory ones so that all of your money isn’t charged with tax.

Furthermore, the interest which you receive on your compensations is also taxable. Some states have this rule in which the offender is required to pay the interest along with the settlement money as well. This is, however, applicable only when the opponent is unable to pay the money to the plaintiff within due date. For example, if you file the suit on Jan 1, 2012, and won the case on Jan 1, 2013, then the offender will need to pay a yearlong interest in addition to the total sum. The money you receive regarding interest is charged with tax.

Emotional Injury Claims

All sorts of claims, except the personal injury ones, are taxable. For instance, if you’re receiving money for psychological trauma, loss of consortium, or lost wages then you will need to pay an optimum amount of money to the tax authorities as well.

What is the amount of tax which I should be paying?

At times, you could be making multiple claims against the offender in a single go. All your claims are liable to tax, except for the personal injury claims. Personal injury claims are usually larger than other sorts of compensations because these involve all your medical expenditures; the money spent on surgeries and operations, medical therapies, consultation fees, and on other similar things. So, you should look out to make your personal injury claim as huge as possible, in the case of an accident. Smaller the amount of additional claims to the personal injury one, lesser you will be paying to the taxation authorities. The Internal Revenue Service can always challenge the taxability and non-taxability of a settlement. However, with the careful allocation of your settlement, you can save a vast fortune from going out in the hands of tax and revenue authorities.

Author Information: Percy Martinez is a Miami personal injury lawyer who has been practicing for over 20 years. Percy helps educate and inform the community on accurate and important information regarding personal injury.

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