Most proceeds from a personal injury taxable are not taxable. But, like most IRS issues, the situation is never cut and dry. Situations exist in which some or all of your personal injury settlement could be subject to tax.
Speak with an accountant for help with questions about taxes. You can also discuss settlement options with a lawyer at S. Burke Law.
When Are the Proceeds from a Personal Injury Settlement Taxable?
The tax treatment of personal injury settlement proceeds depends in large part on what you received the settlement for. In other words, was it for physical injuries or physical sickness, emotional distress or mental anguish, or punitive damages?
Physical Injuries or Physical Sickness
Personal injury settlement proceeds for physical injuries or physical sickness are non-taxable. This includes physical injuries from auto accidents, slips and falls, truck accidents, construction accidents, premises liability, and so forth. It also includes physical sickness from events such as toxic chemical exposure or medical malpractice, or harmful prescription drugs.
These proceeds are usually safe from taxes because the settlement is simply repaying what you had to pay out of pocket for your medical care. The one exception is if you have taken itemized deductions on past tax returns for medical expenses related to your injury or illness.
For instance, your injury occurred in 2015, and throughout 2016 you received medical care to treat it. At year-end 2016, you still had not reached a settlement. To save on that year's taxes, you took deductions for your medical bills. If the subsequent settlement includes compensation to cover those medical expenses, you are liable to make up the difference in taxes you did not pay the previous year.
You would do this by reporting the tax benefit you received in 2016 as “Other Income” during the year in which you receive your settlement. At S. Burke Law, we work with accounting professionals to make sure our clients file correctly and receive the most favorable tax treatment for their settlements.
Emotional Distress or Mental Anguish
If you receive a settlement for emotional distress or mental anguish, its tax treatment depends on whether your condition originated from a physical injury or sickness. If it did, then this part of your settlement is also non-taxable.
If your proceeds for emotional distress or mental anguish are unrelated to any physical condition, then you will probably have to pay taxes on it. However, you can deduct the cost of any medical expenses you incurred for your emotional distress or mental anguish as long as you have not previously deducted those expenses.
Once again, you would report the total amount of your settlement paid for emotional distress or mental anguish, minus your deductions for related medical expenses, as “Other Income” on your tax return for the year in which you receive the settlement.
If you received compensation for wages you lost after having to take time off work, you must pay taxes on that compensation. The IRS treats this compensation the same as it would treat typical wages, which means they are taxable in every circumstance.
In cases which the defendant displayed a wanton disregard for your safety or performed an intentional act such as assault or battery, you might receive punitive damages as part of your personal injury settlement.
Punitive damages, regardless whether received for physical or emotional damages, are always taxable. You must report them as “Other Income” on your tax return for the settlement year.
Sometimes, your settlement will accrue interest between the time the insurer or court issues it and the time you receive it. If so, you must declare the interest portion as income and pay taxes on it, even if your settlement was entirely for a physical injury or sickness.
Paying Taxes on Settlements
Generally, you pay taxes on settlements the year in which you receive them by declaring the taxable portion as “Other Income” on your tax return. However, if you estimate that your tax liability from the settlement will exceed $1,000, the IRS asks you to make estimated tax payments.
Call S. Burke Law at 404-647-4111 to Speak with an Atlanta Personal Injury Lawyer
Please direct any questions about taxes to an accountant. If you need legal help with your personal injury case, call us.
Personal injury cases can be complex, and taxes can throw an added wrinkle into the confusion. At my firm, we take the outcomes of our clients' cases personally, and we pride ourselves on providing skilled representation along with unmatched customer service.
Ready to get started? I look forward to meeting you, answering all your questions, and fighting for your rights. Call S. Burke Law today for a free consultation: 404-842-7838.