The majority of the time, state or federal taxes do not apply to the proceeds of personal injury settlements and verdicts. Punitive damages, emotional distress damages, and lost salary damages are the three possible exclusions. These three categories of damages might be taxable depending on the circumstances.
Read on to learn the basics of how personal injury settlements are taxed. Then contact Law Offices of Fernando D. Vargas at 909-982-0707 if you need to file a personal injury claim or you require a free legal consultation.
The general rule regarding the taxability of injury settlement offers
The money received in a personal injury claim is often not taxable, according to federal and state legislation. This rule applies whether or not you secure a verdict in a personal injury trial or settle a personal injury case.
In actuality, the rule means that you are exempt from include losses like medical expenses and suffering in your gross income.
Punitive damages are the main exception
Punitive damages are one main exception to the general norm relating the taxability of awards involving personal physical injury. Punitive damages in a settlement agreement are always taxable, according to this exception.
Punitive damages are distinct from compensatory damages, so keep that in mind. The latter is intended to make up for specific losses suffered by an injured sufferer (like medical expenses, lost income, and emotional distress).
Punitive damages, on the other hand, are given in a personal injury case to penalize the defendant for engaging in willful or extremely careless action.
Notice that if you win punitive damages in a case, your personal injury attorney will normally make a motion to the judge or jury. The request asks that the precise dollar amount of compensatory damages and punitive damages be stated in the judgement (or on a portion of your payment). This request assures that you can document the tax-free proceeds on your tax return.
Compensation for pain and suffering can be taxable too
The money is taxable if a settlement award or judgement is made solely for mental or emotional agony. Remember that the portion of your payout that comes from a physical ailment or personal injury is not taxed. For tax purposes, emotional distress is not regarded as a form of personal harm or physical injury. Your gross income must therefore include any compensation from an emotional injury award.
Recall that you should get legal counsel from a personal injury attorney or law firm if your case involves emotional anguish. An attorney will typically work to attempt and demonstrate that your case for emotional injury encompasses other sorts of damages, such as damages from a physical injury. You would not have to pay taxes on a final payment if you were successful.
Compensation for lost wages may or may not be taxable
In theory, lost wages that are recovered in a personal injury case are not taxable. Yet, courts have frequently ruled that restitution for lost wages is taxable. The argument goes that since your lost money would have been taxed if it had been earned, it should also be taxed when it is recovered through litigation.
Yet, in reality, a lot of personal injury settlements frequently arrive in the form of a lump sum with no definite breakdown of how much money is allotted for various sorts of losses. This can make it challenging to decide whether and how to tax lost wages.
The key to ensuring you start with a fair settlement or verdict is to contact a top personal injury attorney. You have found that in Law Offices of Fernando D. Vargas. Call us now at 909-982-0707 to request a free legal consultation.
