A common question that personal injury claimants think about
upon the completion of their claim is whether their injury settlement counts as
income for IRS tax purposes. The quick answer is that while most do not, there
are exceptions.
To get the most precise answer that is specifically geared
to your particular situation, you should consult your personal injury attorney
as well as an accountant.
Categorization of
Your Claim Makes a Difference
Your personal injury settlement may be taxable for IRS
purposes depending on the type of case it involves and the type of compensation
you have received for the injuries you have suffered. Generally speaking,
compensation that is directly related to a physical injury or sickness is
non-taxable or tax-free.
For instance, if you are injured in a car accident, incur
$50,000 in medical expenses, and settle for $50,000 with the insurance company,
you do not need to report the proceeds on your tax return. If any of these
proceeds are for emotional distress or mental anguish that is directly related
to your physical injuries, it is also non-taxable. In short, as long as your
settlement is categorized as compensation related to an injury or sickness, the
proceeds will be tax-free.
Exceptions to the
Rule – Taxable Settlement Amounts
There are exceptions to the tax-free personal injury
settlement rule. If your settlement proceeds are categorized as any of the
following, you may be subject to paying taxes:
-
Punitive
damage – Since punitive damages are designed as a punishment to the
wrongdoer, the IRS wants a portion of it.
-
Accrued
interest – Any amount you receive in your settlement that is attributed to
interest is generally taxable.
-
Loss of
income – Any portion of your settlement that is designated towards loss of
income or for lost wages is taxable.
-
Emotional
distress – If you are compensated for emotional distress or mental anguish
that is not related to a physical injury or sickness, it will be taxable.
Call Us
For more information or to schedule a
complimentary consultation with an experienced personal injury attorney, please
call the Law Offices of Samer Habbas at (888) 848-5084.
