Are Personal Injury Settlements Taxable?
You agree to a personal injury settlement after an accident and a serious injury, and you are more than ready to receive your check so you can pay your medical expenses and catch up on other bills. Your attorney will automatically take out the previously agreed-upon contingency fee, but you expect to get the rest of the funds. Many people fail to consider whether the IRS may also want its fair share of your settlement.
While many financial payments are considered to be taxable income by the IRS, there is an exception for settlements and awards for physical injuries or illnesses and most related losses. Injury-related settlements often stem from traumatic accidents, while illness-related settlements can be the result of claims for medical malpractice, toxic exposure, or anything else that made you sick. Neither the IRS nor your state or local government can tax these funds, whether they came from a settlement agreement or a verdict at trial. Compensation for the following injury-related losses will not be taxed:
● Medical expenses
● Lost wages
● Estimated future losses
● Pain and suffering
● Emotional distress resulting from the injury or illness
● Loss of consortium
This is good news for injury and illness victims , as they can often keep the rest of their settlement after paying attorney’s fees to apply to bills and make up for other losses.
Like most tax laws, there are exceptions to the general rule that personal injury settlements are not taxable income. The following exceptions may apply in certain cases:
● If a breach of contract caused you injury and is the cause of action in your lawsuit, your damages will be taxable.
● Settlements to reimburse you for emotional distress not related to a physical injury will also be taxable.
● Interest received on personal injury judgments is taxable income.
● If you previously deducted medical expenses for your injuries from your taxes, the portion of your settlement reimbursing you for those expenses will be taxed.
● Punitive damages are always considered to be taxable by the IRS.
It is important to have a skilled personal injury lawyer handling your settlement agreement to ensure that as much of your settlement as possible is non-taxable. For example, if you have a claim for physical injuries and a claim not related to personal injuries against the same party, your lawyer should make it clear in the agreement which portion of the settlement is related to physical injuries and which is not. Similarly, if a portion of your settlement or award includes punitive damages, this should also be clear, so you can prove how much should be taxed and how much should be tax-exempt.
Resolving a personal injury case can be more complicated than you may imagine and there are many issues to address. Our personal injury lawyers at Brady, Brady & Reilly, LLC in New Jersey help our clients along every step of the way, always fighting for maximum financial recovery. Please call 201-997-0030 or contact us online to schedule a free case evaluation with a New Jersey personal injury lawyer.