Is Your Injury Settlement or Verdict Taxable by the IRS?

If you’ve been injured in an accident, you may be wondering, even if you won significant compensation, whether it’s worth it, knowing that you’ll have to pay Uncle Sam. Extra compensation is great, but not if it’s going to end up in a significant tax bill being owed.

Well, it turns out you don’t have much to worry about, because very little of your settlement or verdict will be considered taxable.

What Cannot be Taxed

What is and what is not taxable, depends on what part of your settlement or verdict is intended to compensate you for what losses.

Almost no part of a personal injury verdict or settlement is considered taxable.

You may think lost wages are taxable—after all, these are wages you would have earned had you been able to work, and you would have paid taxes on that income, had you been able to earn it.

But that’s thankfully not the case; lost wages paid after a personal injury suit are not taxable. Even future claims related to lost wages, such as loss of earning capacity, or loss of future income, cannot be taxed by the IRS.

However, they are taxable, in cases where wages are awarded after an employment lawsuit, such as discrimination, harassment or wrongful termination. In fact, any award for lost wages that is unrelated to a physical injury, would be taxable, although in a personal injury case this is rare, as most of your lost wage claim will relate to injuries sustained in your accident.

The same goes for noneconomic damages. These are damages that have no “price tag” and can’t be counted. Pain, suffering, loss of quality of or enjoyment of life, anxiety, and other intangible losses, are also not taxable.

As a general rule, in a personal injury case, any other sums that compensate you for losses related to physical injury, are not taxable. So, for example, if you received money to fix your vehicle, or money from property that was damaged in an accident, you cannot be taxed on those monies.

That includes money paid to reimburse you for past or future medical bills or expenses.

So What Is Taxable?

There are only limited parts of your settlement or verdict that are taxable.

If you are compensated for damages that are emotional only (that means that they aren’t connected to, or related to, any accompanying physical injury), those damages may be taxable.

Sometimes, a court will award you some interest on your judgment. This is money to compensate you for the time it took for you to receive compensation. Interest is taxable—although rarely is interest ever part of a settlement that happens out of court, so this is only a consideration where a court enters an actual judgment against the defendant.

Punitive damages also can be taxed, although this is not common, and very rare in cases where there is a settlement between the parties.

Questions about your personal injury case? Call the Boston personal injury lawyers at The Law Office of Joseph Linnehan, Jr. today at 617-275-4200.

Source:

irs.gov/government-entities/tax-implications-of-settlements-and-judgments