In nearly all personal injury cases, settlements are reached before the case has a chance to go to jury trial. Once this settlement is reached, your attorney will inform the defending attorney that you have agreed to the settlement either by phone, email, letter, or using some combination of these methods.
The question is: does your settlement get taxed? The answer is generally not.
Personal injury settlements are not taxed by the federal government, or by the state, if the proceeds are for personal injury claims. Damages received as a result of personal injuries are excluded from federal tax law. In any case where an individual receives compensation for personal injury, the proceeds are not taxed. Examples of damages include:
Because the above are a direct result of the injury that you sustained, any compensation you receive will not be eligible for taxation. For example, say that you are in a car accident and you sustain injuries that require medical treatment. Your medical bills, wages lost due to inability to work, emotional suffering because you could not work, and attorney fees will all be compensated for as a result of your physical injury. Therefore, these damages are not taxable.
While most personal injury settlements are non-taxable, there is a situation where your settlement would be taxed: when a breach of contract is involved. If your injury resulted from a breach of contract, you would be responsible for paying taxes on the damages relating to the breach of contract so long as the breach is the basis of the lawsuit.
Also, it is important to understand that punitive damages are always taxed. Punitive damages are those awarded to plaintiffs when compensatory damages are ruled an inadequate remedy for the defendant’s actions. By definition, compensatory damages are to equal the amount of pain and suffering you sustained. In nearly all situations, compensatory damages are calculated based off of actual damages (lost wages, medical bills, etc.) Punitive damages are meant to deter the defendant from engaging in conduct similar to that on which the lawsuit is based.
Typically, your attorney will request that verdicts are separated into compensatory (non-taxable) and punitive (taxable), making it easier to distinguish what settlements you owe taxes on.
Only physical personal injuries are non-taxable, therefore emotional damages are eligible for taxation. Because of this, it is important to disclose even the slightest physical injuries that you sustained in an accident. Emotional injuries are not tax exempt.
Contact an Attorney
In most situations, personal injury lawsuits are complex and require significant time and attention. If you have been involved in an accident, contact an experienced attorney to review your case. The attorneys at Bighorn Law understand that your health is your life, and getting back on your feet is top priority. Contact Bighorn Law to set up a consultation to discuss your case – we are here to get you the justice you deserve.