DO YOU PAY TAX ON AN INJURY SETTLEMENT?
An injury settlement is the determination of both parties involved in a lawsuit to reach an agreement on compensation outside the court system. Significantly, the total amount of your accident settlement is non-taxable if you obtained a settlement for personal injury or sickness and did not seek an itemized deduction for medical expenditures related to the injury or illness. As a result, you should not include the injury payment in your income statement.
However, lost wages, pain and suffering, punitive damages, and emotional distress damages are taxable parts of a settlement. For example, if you obtain compensation for lost wages as part of a vehicle accident settlement, the payment is taxable because wages are taxable in and of themselves.
Compensation for medical expenses is only taxable if you claimed those expenses as tax-deductible on previous years’ tax filings. Significantly, physical sickness damages are not taxable, but emotional anguish damages are. Let’s examine a few tax concerns that relate to personal injury settlements.
Injuries or Sickness
Any damages obtained for personal physical injury or sickness are tax-deductible. If you received a settlement for illness or injury and didn’t request an itemized tax deduction for medical expenses, your settlement income is non-taxable. So, you do not have to report your injury case settlement as income on your tax returns.
However, there are additional circumstances in which you may be required to pay taxes. Consider the following scenario:
- Pay taxes on this amount of your settlement on a pro-rata basis if you took a tax deduction for more than one year.
- If you deducted medical expenditures from your taxable income as part of your settlement, you should include that component of your settlement in your taxable income.
- A portion of your settlement may be taxed if you used Form 1040 to deduct medical expenses in earlier years for tax purposes.
Pain and Suffering
You might have been awarded damages for pain and suffering if you endured mental agony or emotional distress. The money you get from pain and suffering damages may be taxable. These losses are compensated in the same way as injuries or illnesses are compensated. However, you should take note that under Section 104(a):
- Mental suffering is not considered an injury or illness.
- Your settlement is taxable if your pain and suffering were not caused by a personal injury, personal physical injury, or physical illness.
Significantly, you can reduce the amount you have to disclose on your income taxes by:
- If you paid for related medical expenses but did not deduct them from your taxes, and if you didn’t get a tax break, you might deduct medical expenses for mental suffering. Attach a statement to your tax return if you declare any amount of your pain and suffering compensation on your taxes.
- Your statement should show the total amount of your settlement, minus any qualified medical expenditures you have not yet deducted or expenses you deducted without earning a tax advantage.
Criminal Justice Awards
The IRS will regard criminal justice situations that do not include injury as taxable. An armed robber, for example, rips up the victim’s store but does not injure anyone. If a prize is given to repair the store, it will not be tax-free.
According to the New York State Bar Association, the court may also award a victim restitution for the consequences of a crime, such as lost pay, damaged property, and medical bills.
Damages awarded in civil litigation are not the same as restitution. In reality, the victim may be entitled to civil and criminal damages. In most cases, restitution is not taxed.
The court may give punitive damages if you are wounded in an accident involving intentional harm, gross carelessness, or a willful disregard for public safety. Damages are awarded to punish the offender as a substitute to reimburse the losses due to the injury. Punitive damages are subject to taxation; they should be shown as “other income” on your tax return.
Because a portion or all of your case payout may be taxed on your tax return, maximizing your injury settlement is critical before your case is resolved. Determining whether your injury compensation is taxable might be difficult, especially if you don’t know how much of your settlement goes into each category. Speak with your lawyer for further details or contact IRS.
Social Security Disability
Obtaining Social Security Disability Income can often necessitate the assistance of an attorney (SSDI). This form of revenue is subject to taxation. However, many recipients do not earn enough to owe the IRS tax obligations. It is an exception when a spouse’s salary or other household income puts them at a higher tax rate.
SSDI may be awarded in a large lump sum to reflect retroactive payments in specific instances. Although the IRS expects taxes, it does not penalize SSDI recipients and instead allows for a fair payment plan.
You may include money for property damage in your injury compensation. If you were in a car accident, your settlement could consist of money to repair or replace your vehicle. Property loss damages are not often taxed.
As you can see, even though your injury award is probably tax-exempt, it can still be a complex notion to grasp. Due to this complexity, you must speak with a lawyer about your prospective settlement before digging deeply into the procedure and being caught off guard by the unexpected loss of a substantial chunk of money owing to taxation. With the help of a lawyer, you will be able to comprehend your injury claim and any compensation associated with it.