Personal injury settlements can be very large, lump sum payments. It’s not unheard for them to be as much as six or seven figures. We all know the government taxes large sums of money. Therefore, you must be wondering if your settlement counts as taxable income. Normally, the answer is no. The government will not tax your settlement. However, this isn’t always a hard and fast rule. As personal injury lawyers, our goal in this article is to educate you on what constitutes a tax-free personal injury settlement.
Injuries and Damage
The IRS has created regulatory parameters for personal injury settlements. Section (104) (a)(2) prevents the taxation of any money received for personal injury lawsuits. The law does make an exception for punitive damages. Punitive damages are a large sum of money awarded to a victim in an effort to punish the defendant. The court will make the distinction between punitive and compensatory damages.
A portion of your personal injury settlement is meant to cover your medical expenses and lost wages. This is called compensatory damages. The government recognizes these damages as recovery for the pain and suffering you experienced during the accident. Therefore, it is not taxable.
Compensation for vehicular damage is also recognized as general damages by the law. This money is meant to cover car repairs and car rental expenses you incur as a result of the accident. Lost income is a different story. Damages that are specifically marked as “lost wages” may be subject to income tax. This happens because the money you receive is meant to cover lost wages that would normally be taxed by the government. In a settlement, the insurance company is required to repay you for lost wages. This will be outlined by court documents.
Keep in mind that compensatory damages normally include physical injury, illness or property damage. If you are suing an employer for harassment or discrimination, that settlement money can be taxed by the government. Breach of contract settlements are also taxable. Emotional distress is non-taxable when it is injury related. For instance, if you lose a limb due to a car accident and become depressed, you can sue for pain and suffering and recover damages. These damages will not be taxed because they are directly linked to the physical injury.
Contact a Personal Injury Lawyer
The process of figuring out what portion of your settlement is which can be very confusing. A financial adviser can help you through this process. The attorneys of Heuser & Heuser are not only lawyers but also confidants. They thoroughly understand the legal process and they will be able to advise you on your settlement. It is important to keep up with your taxes to ensure no liens or holds will be put on your settlement. When you hire Heuser & Heuser you can be assured that our personal injury lawyers will be there for you every step of the way. They have handled hundreds of thousands of dollars in settlements. If you or a loved one has questions about your personal injury settlement, contact Heuser & Heuser today!