Personal Injuries can occur anywhere. In the workplace, at home, your business premises and lots more. There is usually some form of financial settlement when personal injuries occur. Most cases do not get to the court, and some are settled during trial. But what happens next after you have been settled? You would settle the attorney and then probably settle taxes. There are lots of things to know about Tax liability in a personal injury settlement. Tax codes are confusing as it relates to personal injury settlements.
Physical injuries are not taxable
Federal and state law does not tax in sums gotten from the compensation of personal injury claims. Whether the case was settled out of court or settle in the court, you won’t pay tax if there is a physical injury. So, be aware that the federal government or state would tax you on sums received if there is no evidence of a physical injury. That means if you suffer emotional distress without a physical injury, then you would pay tax. If you can prove even the slightest physical injury you won’t be taxed. You will pay taxes if your injury is a result of a breach of contract. That means if your injury were caused as a result of negligence or carelessness from you, then you would be taxed.
Examples of personal injuries are
- Pains and suffering – Bending or twisting awkwardly as a result of your job function, getting injured through a faulty machine or the use of equipment, exposure to unfavorable conditions, and lots more. If there is any evidence of physical injury, then it’s not taxable
- Ill health – This can be physical sickness as a result of negligent exposure to a germ or other factors that made you sick.
- Mental issues – Mood disorders, personality disorders, trauma and lots more
- Medical bills – Money spent on medical bills of a person’s health. The compensation you receive is not taxable if there is evidence of physical injury. For example, if a staff or customer gets injured as a result of faulty equipment.
- Emotional distress – unpleasant emotional reactions like humiliation, fury, anguish, etc
- Loss of consortium – deprivation of benefits
- Attorney’s fees – compensation for legal services by an attorney
- Lost Wages – Settlements for lost wages are generally taxable.
- Destruction of Properties – Settlements for the destruction of property is not taxable. For if someone crashes his car into your home, then compensation you receive from the damages is not taxable. But you should know if the compensation is worth more than the value of your property, then the difference would be taxed.
Compulsory and Punitive damages
In personal injuries, you should determine your tax liabilities because different types of compensations have different tax liabilities. There are two types of damages, which are Punitive and compulsory damage. Punitive damages are taxable. If your claim is both, then your lawyer should be able to ask the jury to separate your verdict. That means you would be taxed for punitive damages but won’t be taxed for compulsory damages. A specialized injury law firm can aid you greatly if you suffer a personal injury. They can assist you in reducing your tax liability, amongst other functions.
What about if you have double or more claims against the defendant, how do you get as much of your settlement nontaxable? If you have a personal injury claim against a defendant and other forms of claim, then you should explicitly state the amount of settlement that relates to personal injury and the amount that relates to non-personal injury claims. This can be challenged by tax authorities, but it gives you a better chance of getting as much of your settlement none taxable.
Interest in personal injury claims is taxable. That means the interest you receive based on the length of time your case is pending would be taxed. As an example, if you filled your suit on December 1, 2015, your interest would start counting on the same day you filed your suit until you receive payment. If you won the trial on December 1, 2018, then you would earn interest for three years. That interest is taxable, but the sum claimed for the personal injury won’t be taxed.
As we said before, claims from emotional injuries without evidence of a physical injury would be taxed. The same applies if your claim is employment discrimination.
In the case of personal injuries, you should work with your attorney to ensure that your taxable sums are as low as possible. You should be able to make an estimated payment before you file. Failure to do so may incur penalties and more fees. Itemizing your settlement with the aid of your attorney might also reduce your tax liabilities on personal injury settlements.