Do You Pay Taxes on A Personal Injury Settlement?

After a potentially long process from an accident experience that resulted in injuries to the final agreed upon settlement, it may seem like a relief to finally close a case and have access to much needed financial resources. If a victim worked with a personal injury attorney that legal professional will take a portion of the settlement to pay for their legal services, which is called a contingency fee. Then the victim walks away with the remainder of the settlement.

However, the settlement funds received may be taxed by the United States Internal Revenue Service (IRS). Lawyers often are asked the question, “Do you have to pay taxes on a personal injury settlement?” This is an important question because when a victim considers their total damages, the actual amount they get to take home once legal fees and other expenses are deducted will significantly impact their bottom line. Victims should consider speaking with a personal injury lawyer after an injury accident in the jurisdiction where the incident happened for more information on what to expect from the claims process as well as how compensation is divvied out.

Types of Damages that Can Be Paid by a Personal Injury Settlement

When a person is injured in an accident caused by negligence of another, they may be able to file a personal injury claim for compensation. The compensation they receive should reflect all of the harm and losses they had to endure from the incident. There are two main types of damages that a victim may include in their personal injury claim (and a third that while rarely awarded, in some cases is necessary).

Economic Damages

Economic damages are the easier of the two types of damages to calculate because these losses tend to come with receipts. For example, medical costs, car repair bills, lost wages when one’s injuries prevents them from working, are all types of solid financial damages that come with a clear number. A victim can use receipts, medical bills, pay stubs, and other tangible evidence to show that actual summation of one’s economic losses.

Non-Economic Damages

Non-economic damages are the forms of harm that are more subjective which makes determining a realistic cost more of a challenge. Identifying all of the damages that exist in this category and calculating a true value is something that an experienced personal injury attorney will be able to do. It is critically important to get as much from a personal injury claim as possible. The best way to do that is to have every single damage detected with an appropriate cost attached so that when a claim comes to a resolution the victim will not have to bear the financial burdens out of their own pocket. Examples of non-economic damages include pain and suffering, emotional distress, permanent disfigurement, humiliation, and many more.

Punitive Damages

Punitive damages are not awarded as often as economic and non-economic damages are. In particularly shocking and appalling accident situations where the defendant has been deemed to have engaged in egregious acts that lead to the accident happening it is possible that punitive damages are added as an extra amount to a settlement. In this way, a victim may secure both non-economic and economic damages along with another amount of money. Punitive damages are meant to both punish the individual for their horrible behavior and act as an example to others that such actions will not be tolerated.

Taxes and Personal Injury Settlements

There are several resources that the IRS offers the public when it comes to deciphering where tax obligations exist. One is the IRS Publication 4345. While very informative, it is not uncommon to be confused by the stipulations and rules. Since understanding one’s tax liabilities correctly is necessary to avoid costly penalties and other repercussions working with a personal injury attorney that understands how personal injury settlements break down, including how they are taxed can be advantageous. Also, one of the many responsibilities’ attorneys have is to keep up with changing laws and regulations. Should guidance change, an attorney should be consulted to determine such adjustments and help their clients understand their legal and financial obligations.

The general answer to the question of “Do you have to pay taxes on a personal injury settlement?” is yes and no. If that sounds unclear and makes things more difficult to understand, the reason why is because different damages are looked at in different ways by the IRS. For instance, medical expenses are not taxable by the IRS, that is unless you have taken an itemized deduction on your taxes for medical costs. In this case, you may be subject to taxation on some of those expenses. By contrast, property damages, like could result from a car accident would not be taxed. Emotional distress, though, can be taxed or not taxed based on its origins.

Speak to a Personal Injury Attorney Today

“Do you have to pay taxes on a personal injury settlement?” The answer is mostly no, but in some instances yes. Figuring out what is taxable and what is not can be a lot to ask of a victim that is also trying to focus on recovery from their injuries. Working with an experienced personal injury attorney who can provide legal guidance and manage a claim can take much of the stress out of the process and give victims peace of mind that things are being done correctly. For this reason, after an injury accident, you may find great advantage in connecting with a personal injury attorney.