Understanding the Tax Implications of Personal Injury Settlements

When you start working closely with a Palm Bay personal injury lawyer, you will likely have a long list of questions about taking legal action against someone who caused a car accident, a slip-and-fall accident, or another type of accident you were involved in. “Are personal injury lawsuit settlements taxable?” might be one of them.

Make sure you find the answer before legal proceedings begin. The last thing you want to do is wait until your case concludes to discover that you owe a large lump sum tax payment to the Internal Revenue Service.

Being saddled with an unexpected tax burden in the aftermath of a personal injury lawsuit could leave a sour taste in your mouth. In a worst-case scenario, it may even prevent you from paying off medical expenses and covering lost wages associated with your accident.

Learn about the tax implications on personal injury settlements below.

Are Personal Injury Lawsuit Settlements Taxable?

The good news for those who file personal injury lawsuits in Florida is that the answer to the question, “Are personal injury lawsuit settlements taxable?” is often “no.” You shouldn’t need to worry about a personal injury settlement increasing your state or federal tax liability and cutting into your agreed-upon settlement amount.

However, this is only a general rule that applies to the majority of personal injury settlements. In rare instances, accident victims might have to pay taxes to the federal government after settlement negotiations in their cases are complete.

Determine whether your case will fall into this category in advance. This will prevent you from spending all your settlement proceeds covering economic damages, like medical bills and lost income, and non-economic damages, such as pain and suffering and emotional distress.

When Are Personal Injury Lawsuit Settlements Taxable?

While the answer to the question, “Are personal injury lawsuit settlements taxable?” is “no” more often than not, you shouldn’t assume this is a hard-and-fast rule. If you make this mistake, you could end up with a huge tax liability on your hands after finding out there is a taxable portion of an accident settlement.

Fortunately, only a few exceptions lead to plaintiffs facing taxable personal injury settlements. Still, you should ensure they’re on your radar throughout your legal proceedings.

Here are several examples that showcase when personal injury lawsuit settlements are taxable.

When Compensation Includes Punitive Damages

Personal injury settlements typically consist of compensatory damages, also known as actual damages. These damages cover accident-related costs, including:

• Medical expenses
• Lost wages
• Property damage bills

Personal injury settlements might also include punitive damages, which are designed to punish defendants rather than compensate plaintiffs.

If you receive an accident injury settlement or judgment in Florida that includes punitive damages, the IRS might consider this part of your gross income. You should set aside a portion of the settlement to cover any taxes you owe.

When Compensation Isn’t Directly Related to Physical Injuries or Illnesses

In addition to possibly including punitive damages, personal injury settlements and judgments might include non-economic damages. These damages account for non-monetary losses people experience following auto accidents, motorcycle accidents, pedestrian accidents, slip-and-fall accidents, and medical malpractice cases.

Examples of non-economic damages include the aforementioned pain and suffering and emotional distress as well as:

• Loss of enjoyment of life
• Loss of companionship (usually applies to wrongful death cases)
• Reputational damage

If these damages stem directly from the physical injuries or illnesses caused by accidents, they aren’t taxable. However, if you receive compensation for emotional distress unrelated to bodily injuries or illnesses, you may have to pay taxes on the taxable portion of a settlement or judgment.

When Compensation Covers Medical Expenses Previously Deducted on a Tax Return

The Internal Revenue Code includes many tax laws related to the tax deductions people may claim when filing yearly tax returns. In prior years, you may have taken advantage of your ability to deduct medical expenses from an accident as itemized deductions.

It made sense to do this, but you should be aware of its tax implications. If you earn a personal injury settlement or judgment, you may have to report the part tied to medical costs as taxable income.

Tips for Preparing To Deal With Taxable Personal Injury Settlements

Hopefully, the answer to the question, “Are personal injury lawsuit settlements taxable?” is “no” for you. In case it isn’t, be ready to deal with the ramifications of receiving a taxable personal injury settlement or judgment.

These tips will help you prepare for the possibility of paying taxes on a personal injury settlement payment.

Maintain Detailed Records

Keep meticulous records throughout your personal injury claim to make paying taxes later on a settlement or judgment easier. These records should include:

• Medical bills
• Property damage repair receipts
• Communications with your lawyer, a defendant and their legal team, insurance companies, etc.

Search for a Trusted Tax Professional

The personal injury lawyer you hire to handle your case can provide information on the tax implications of settlements and judgments. However, you should also speak with a tax professional with experience helping those who receive settlement checks in personal injury cases. They will analyze your case and tell you what tax obligations you might have, if any.

Consider Structuring a Settlement To Minimize Tax Obligations

During personal injury settlement negotiations, you may have the option to structure your settlement money to minimize your tax obligations. Discuss this with an experienced personal injury attorney and a tax professional.

Contact Us for Help With Navigating Your Personal Injury Case

The question, “Are personal injury lawsuit settlements taxable?” usually has a cut-and-dry answer. Many personal injury plaintiffs will find the answer is “no.”

However, you shouldn’t assume this is always the case. Let a personal injury lawyer from Alpizar Law Firm provide a better answer after evaluating your case’s circumstances. They can show how much you might have to pay the IRS after receiving a case settlement check.

Call us at (321) 676-2511 today for legal advice, or read through our other personal injury blog posts to find answers to more pressing questions.