Are Personal Injury Settlements Taxable?

Most of the work is completed once you resolve your personal injury case and receive a fair settlement from an insurance company in Texas. However, you must not forget to consider the possible tax implications of your personal injury settlement. Although, for the most part, personal injury settlements are not taxable, some exceptions apply. It is important to work with an attorney to correctly organize your personal injury settlement for tax purposes.

The IRS Does Not Tax Most Personal Injury Settlements

The Internal Revenue Service (IRS) has rules regarding the taxability of personal injury settlements and jury verdicts obtained from lawsuits. Publications from the IRS state that, in general, the federal government does not tax settlements received for physical injuries or illnesses. These settlements are not included as part of your income for federal tax purposes. This means you do not have to pay a federal tax on your personal injury settlement.

However, this rule only applies if you did not list your medical expenses related to the injury as an itemized deduction on a prior tax year. If you did, you will owe taxes on the medical portion of your personal injury settlement. This is to prevent you from receiving double recovery for your medical costs.

If you received a tax break for your medical expenses as a deduction in the prior tax year, it would not be fair to also keep the full amount of your medical bill settlement without paying taxes. In this case, you must report the part of your settlement that is for medical expenses as “Other Income” on Line 21 of Form 1040 while doing your taxes.

Exceptions to the Rule

There are other exceptions to the IRS tax rule as well. Although settlements awarded for physical injuries and illnesses are not taxable, settlements for nonphysical losses, such as emotional distress and mental anguish, may be subject to taxation. This is the case if you received a settlement purely for your non-economic damages, and not for emotional distress or mental anguish related to a physical injury or illness.

According to federal tax law, any proceeds received for noneconomic losses connected to a physical injury or illness are not taxed. However, if you did not suffer a physical injury and received a settlement for noneconomic damages alone, you would have to pay federal taxes on this settlement or judgment award.

In addition, you may have to pay federal taxes on any part of your settlement awarded for lost wages in an employment-related lawsuit. These are viewed as taxable wages. If you receive interest on any settlement, this is also taxable as Interest Income on Form 1040. Finally, any punitive damages earned in a settlement are subject to federal taxation, even if they were awarded for a physical injury or illness.

How Can a Personal Injury Attorney Help?

Tax laws are always complex, but they can be especially complicated when applied to a personal injury settlement or judgment award. You have enough to worry about as an accident victim with serious injuries. The best way to make sure you are not paying too little or too much in taxes on your personal injury settlement is by working with a personal injury attorney in San Antonio.

An attorney can ask the courts to organize your settlement correctly to make taxation simpler. Your attorney can request that the settlement check distinctly separate your compensatory and punitive damages, for example, so that you only pay taxes on the correct portion of your award. A local attorney will also be able to help you with any state tax implications.

If you need assistance with a personal injury settlement, contact the Hill Law Firm to help you file a lawsuit, organize your settlement and protect yourself from over-taxation.

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