When it comes to settlements for personal injury lawsuits, one topic that is rarely discussed is the tax implications of that settlement. Many personal injury settlements involve a large lump sum payment; failure to pay the required taxes on an amount that large could land you with a significant penalty with the IRS. But are personal injury settlements even taxable? According to the IRS, it depends on the circumstances surrounding your settlement. In fact, it is possible that part of your settlement is taxable while other parts are not. Typically, your settlement can be itemized into different sections including medical costs, pain and suffering, lost wages, and even interest. Ultimately, it depends on what the purpose of that part of your settlement is.

Repayment for Medical Bills 

Fortunately, any part of your settlement that is earmarked for claims regarding your personal physical injuries or illnesses is not taxable. If your entire settlement is entirely related to your injuries, you may not have to pay taxes on any of it. However, there is an exception. Any money that is for medical bills that you deducted from your taxes in previous years must be counted as income on your current year’s taxes.

Emotional Distress

For settlement money intended to address emotional distress or mental anguish, it depends entirely on the cause of your distress. If your emotional distress stems from physical injuries or illnesses, you will not be taxed on that settlement. If your emotional distress were related to any other factor, you would likely need to pay taxes on that amount.

Lost Wages

Your tax responsibility on lost wages can be a complicated issue. While lost wages are taxed, the actual taxes due can vary depending on your circumstances. If the lost wages you were awarded were related to your employment for another business, your lost wages recovery would be subject to social security and Medicare taxes just like your paycheck would be.

If your lost wages are related to lost profits for a trade or business, you must report any lost wages as net earnings are subject to self-employment taxes.

Interest

You are required to pay taxes on all interest payments. In fact, IRS Form 1040 provides for a section titled “Interest Income,” which is designed for this exact purpose.

Punitive Damages

Just like interest payments, any punitive damages must be reported as income on your tax return. You must report any punitive damage payments as income on the “Other Income” section of IRS Form 1040. This is the case whether the source of your claim was from personal injuries or otherwise.

For More Information, Contact Joel Williams Law, LLC

Regardless of the outcome of your personal injury case, the proceeds of your case will be taxed the same. If you are concerned about the possible tax implications of a personal injury settlement, your best course of action is to discuss your case with a professional. Joel Williams is an experienced personal injury attorney that can guide you through the process from beginning to end. To discuss your case, contact Joel Williams Law, LLC, online or at (404) 389-1035 to set up your free consultation today.

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