It seems like politicians are always finding new ways of taxing us, even when we’re down and out. When you suffer a personal injury due to someone else’s negligence and receive a settlement, you can be sure that the government will try to get its share of at least some of your award money. Which funds are taxable all depends on what you were compensated for in your personal injury settlement.
Taxation of Personal Injury Settlements
Personal injury settlements are awarded in a lump sum, but that sum is often broken down into subcategories. For example, your settlement award may compensate you for only medical expenses, or it may also include compensation for lost wages, pain and suffering, or other damages.
Common settlement subcategories include:
- Lost wages
- Lost profits
- Punitive damages
- Pain and suffering
- Medical expenses
- Damages for emotion distress
- Future ongoing medical care and treatment
What you are compensated for and how much you receive for each category will be determined by the court, or negotiated by your attorney in the case of an out-of-court settlement.
Personal Injury Awards that are Not Taxable
Most settlement funds are not taxable. For example, personal injury claims that compensate you for a physical injury are not taxable, either by the IRS or the state. Compensation in personal injury claims may include lost wages, medical bills, emotional distress, pain and suffering, loss of consortium (inability to have sex), and attorney fees. As long as the damages all stem from your personal physical injury due to someone else’s negligence, you will not have to pay taxes on your settlement.
In addition, awards for illness that resulted from negligence are also not taxable. For example, if you were exposed to bacteria or a virus that resulted in your becoming ill, any damages received as a result of the illness will not be taxed. An example might be exposure to bacteria or a virus in a hospital or during a medical treatment that could have and should have been prevented.
Taxable Portions of Personal Injury Awards
Portions of your settlement may be taxable if they arise from damages other than your personal injury. For example, claims for job discrimination or emotional distress that do not involve an injury may be taxed. You could also be taxed on the interest that accrues on your settlement while your case is tied up in court.
An exception to the physical injury rule is if the premise of your lawsuit is breach of contract, and that breach resulted in your physical injuries. In that case, you will have to pay taxes on the entire settlement.
If punitive damages are imposed on the defendant, you will also have to pay taxes on those funds. Punitive damages are imposed in addition to other damages, with the intent of teaching the defendant a lesson for their negligent behavior. In such cases, your lawyer will most likely ask the judge to separate the judgement into two verdicts, one for compensatory damages and another for punitive damages, to reduce the taxable amount.
Do You Have to Pay Taxes on Your Injury Settlement?
Your lawyer will help you sort through the details of your settlement, to determine which parts of it are taxable. Bear in mind that if your legal fees and pre-settlement funding cash advance are taken from your total settlement award before you receive the balance, you will still be responsible for whatever taxes are due for the entire amount of your settlement.
Still have questions about the taxability of your personal injury settlement? Contact the legal professional team at Cronus Capital Group, and let us help you get the most out of your personal injury lawsuit.