Are Personal Injury Settlements Taxable?

by Staff | July 6th, 2020

Is personal injury settlement taxable

After an injury that wasn’t you fault, getting compensation for your expenses is likely a big priority for you and your loved ones. You may be too hurt to work, and that means no paychecks for weeks, months, or years. In addition, your injuries may require extensive medical treatments. With no income, it can be difficult to afford those treatments, let alone your daily living expenses.

At Fleschner, Stark, Tanoos & Newlin, it’s our goal to get injured victims maximum compensation for their injury-related expenses. But whether money is awarded via a settlement or a jury decision, many of our clients worry about how to report the money on their taxes. After all, it’s a foregone conclusion that large lump sums such as those awarded in injury settlements are heavily taxed, right?

Settlements for Physical Injuries Aren’t Taxable Income

Thankfully, you don’t owe the IRS or your state of residence, whether it’s Illinois or Indiana, a single penny for any money you receive as part of a settlement for a physical injury. That includes settlements for injuries caused by auto accidents, truck accidents, slips and falls, and more.

In addition, personal injury settlements are considered non-taxable regardless of how they’re awarded. What does this mean? If our Indiana personal injury lawyers negotiate a fair private settlement with the insurance company, that money will not be taxable. Unfortunately, insurance companies don’t always cooperate. When that happens, we don’t hesitate to go to trial. If a judge or jury rules in favor of you and awards you a settlement, you don’t have to pay taxes on the damages you receive in this manner either.

What Are Physical Injuries?

When it comes to determining if an injury settlement is taxable, it’s important to define what a “physical injury” actually is. Physical injuries are considered injuries or illnesses that cause victims to incur lost wages, medical bills, emotional distress, pain and suffering, loss of consortium, and even attorney fees. That means physical injuries cover everything from physical accidents to medical malpractice to even being negligently exposed to viruses or bacteria that result in infectious disease.

Punitive and Emotional Damages Are Taxable

Although many physical injury claim awards are considered non-taxable, not all of the money that some victims receive after winning their settlements stays in their pockets. Punitive damages may be part of your award, especially when the at-fault party acted with extreme negligence, maliciously, or with intent to harm. Punitive damages are always taxable, and they can often be significantly higher than traditional damages. However, only the portion of your award that is considered punitive will be taxed. If you receive punitive damages in addition to compensatory damages, your compensatory damages will remain untaxed.

In addition, money awarded for emotional injuries is also taxable. That means the IRS may have a claim to some of your award if you received a settlement for emotional distress or discrimination. However, if any aspect of the claim involved physical injury, your emotional distress claim may be considered non-taxable. Talk to a lawyer if you are unsure whether your claim is considered a physical injury.

Get a Lawyer on Your Side to Maximize Your Award

Because many claims involve multiple types of damages, it’s important to have a law firm on your side that knows the differences between them and can help you ensure that they’re clearly divided in the language of the settlement. Remember, the insurance company doesn’t care what happens to the money after it pays you, and that means you may be in for a rude awakening if the IRS decides it has a stake in a sizable percentage of your settlement.

With our lawyers on your side, you’ll get peace of mind knowing that we’ve not only worked hard to maximize your settlement, but also that we’ve structured your award in a manner that preserves your take-home money. You’re injured and deserve compensation for what you’ve been through—the last thing you need right now is to pay a huge chunk of taxes on money that’s rightfully yours.

Need a savvy law firm that knows what it takes to win and help you keep as much money as possible after a favorable settlement? Contact us today.

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