A personal injury settlement is meant to compensate you for your losses. The law cannot undo your injuries, the only thing it can do is provide a legal means for you to receive compensation from the party who caused the accident that resulted in your injuries. Personal Injury attorneys like Hupy and Abraham, S.C. negotiate with insurance companies and ensure that clients are fully compensated for all costs associated with their injury.
Once you have completed your case and received your settlement, the general rule is that proceeds from a personal injury claim are not taxable under federal or state law. However, there are some exceptions to the rule.
Compensation for Physical Injury
According to the Internal Revenue Service, “If you receive a settlement for personal physical injuries or physical sickness and did not take an itemized deduction for medical expenses related to the injury or sickness in prior years, the full amount is nontaxable. Do not include the settlement proceeds in your income.” [IRS Publication 4345 Rev. 4-2015]
As long as the compensation you receive relates to a specific physical injury or physical illness, your personal injury settlement should be nontaxable.
NOTE: If you previously deducted medical expenses related to the injury on your tax returns and the deduction provided a tax benefit, that amount of your settlement will be subject to taxes.
What About Mental Anguish and Emotional Distress?
Many personal injury settlements include an amount to compensate for mental anguish and emotional distress. The IRS will not tax this amount, as long as the mental anguish and emotional distress is directly caused by the physical injury and/or physical sickness.
For example, if you are hurt in a car accident caused by someone else’s negligence and receive a settlement of $50,000 for your medical expenses, this will be nontaxable. Furthermore, if you also receive an additional settlement of $20,000 for emotional distress due to spending months in pain and loss of your ability to live your life normally, this would also be considered nontaxable, because it was directly related to your injury.
What About Property Damage and Lost Income?
Oftentimes, attorneys like Hupy and Abraham, S.C. assist clients in recovering lost income/wages and money associated with property damage as a result of an accident that injured them. When someone else is responsible for the circumstances causing your injuries, you have a right to expect payment for your damaged property and recovery of lost income in addition to your injury compensation. But only one of these is nontaxable.
- Damaged Items: In most cases, any compensation you receive for damages resulting from your accident is nontaxable. An example of this may be the costs of repairs that were paid to fix your car, replace your ruined glasses or reimbursement you might have received for things such as a rental car.
- Lost Income: Here is a specific exception. Compensation for lost wages and income in a personal injury settlement is taxable. This portion of your settlement is intended to reimburse you for income you lost due to the accident. If the accident had not occurred, you would have earned the income and paid taxes. Therefore, you must pay taxes on that amount now. You will need to claim this amount on your taxes.
Always Speak with Your Lawyer or Tax Adviser.
Tax law is a complex subject, and this information is just a brief summary. You should always discuss tax matters with a professional tax adviser if you feel unsure. Should you have any questions about your settlement, please feel free to contact us anytime.
Contact the personal injury attorneys of Hupy and Abraham, S.C. at 800-800-5678 or chat with us live anytime at hupy.com.