What Is Taxable In Personal Injury Settlement Under The Us Tax Code?
When considering the tax implications of a personal injury judgement or settlement, it is important to note that the amount taxable under the U.S. tax code can vary by jurisdiction. However, the government takes a fairly straightforward approach to personal injury settlements, and if you’re anticipating an award, there are just several key tax-related points to remember regarding your potential windfall.
Non-Taxable Compensation
You will not be required to pay taxes on any money awarded to you to compensate for legal and medical bills. Depending on the amount by which your personal injury settlement exceeds the total cost of your injury, you could be entitled to receive a sizeable tax-free windfall as a result. It does not matter whether you went to trial and won the award, and it makes no difference if you settled the case prior or after you filed a lawsuit in court. Neither your state nor the federal government can tax you on the verdict proceeds or settlement in most personal injury claims.
Taxable Compensation
However, any punitive damages that you receive are taxable, and you’ll need to add the full value of these damages to your “gross income” calculation on the tax return for the year in which the personal injury settlement was issued. Your attorney will always ask the jury or judge to separate the verdict into punitive and compensatory damages to ensure that you can show the IRS that a portion of the award was for compensatory damages, which are not taxable.
In addition, you will be responsible for reporting any award that you receive to cover lost wages or loss of earning capacity as well, and one other taxable portion of the verdict is interest on the judgement. Most states are required to add interest to the verdict for the length of time that the case had been pending from the state on which you filed the lawsuit.
Keep in mind that the verdict or settlement is non-taxable only as long as the award arose from a physical injury. For example, if you have a claim for employment discrimination or emotional distress but you did not suffer any actual physical injury, then your award would be taxable unless you and your legal counsel can prove even the slightest amount of physical injury or harm. For this reason, it is important to obtain all medical records from your healthcare provider and give them to your attorney to review so that he or she can make an accurate determination whether physical injury will play a role in your settlement.
