Generally, you do not pay taxes on personal injury settlements for physical injuries or illness. This means you can receive tax-free compensation in a settlement for your medical bills, property damage, and many other quantifiable losses.
However, money for your lost wages, compensation for your emotional distress, and punitive damages may be taxable. Your Bellevue car accident lawyer or other attorneys with relevant case experience can provide you with information about the tax implications of a personal injury settlement.
In your case, your attorney will build their argument against anyone who caused you to get hurt. Plus, they will work hard to get you a settlement that covers your injury costs and other losses.
When Do You Pay Taxes on a Personal Injury Settlement?
Washington does not have a state income tax. Therefore, if you accept a personal injury settlement, you do not have to pay state taxes on it. Yet, you are subject to federal tax laws. Based on these, you may have to pay taxes to the IRS on certain parts of your settlement.
The IRS may treat your settlement as non-taxable if you get money for a physical injury or illness. For example, you are injured in a truck accident, and a trucking company offers you a settlement for your medical bills. This settlement is likely to be non-taxable if you accept it. Regardless, you should still review the settlement offer with your Bellevue truck accident lawyer.
Now, look at what can happen if your settlement includes money for your loss of income, emotional distress, and punitive damages. Due to federal tax laws, you may have to pay taxes on the compensation you get for these losses. Thankfully, your personal injury lawyer will make sure you get a fair settlement, even if you have to pay taxes on some parts of it.
What Are the Taxable Parts of a Personal Injury Settlement?
Give a personal injury settlement your undivided attention. Otherwise, you risk accepting a settlement worth less than what you have suffered in losses. Before you approve a settlement proposal, account for the taxability of legal settlements. Here are three parts of personal injury settlements that are taxable to consider.
Loss of Income
You suffer a traumatic brain injury (TBI) or other severe trauma that will prevent you from working again. Have your Bellevue catastrophic injury lawyer include your current and future income losses in your compensation request.
But remember that your lost income is treated the same as if you had earned the wages while working. Thus, the IRS may tax it.
Emotional Distress
The party responsible for your injuries offers you a settlement for your emotional trauma unrelated to the physical harm that you have suffered. If your settlement includes money for your emotional distress not caused by a physical injury, this portion is classified as taxable income.
Punitive Damages
There are times when punitive damages are provided to accident victims to deter liable parties from committing future acts of negligence. In many personal injury settlements, these damages are taxable.
Outside of these parts, interest that accrues on your personal injury settlement between the time a judgment is made and when you receive payment is taxable. In addition, if you previously claimed a tax deduction for medical expenses and received a settlement that reimbursed you for these costs, you must report that portion of the settlement to the IRS as taxable income.
Additional Factors That Can Determine if You Have to Pay Taxes on Your Personal Injury Settlement
How your personal injury settlement agreement is worded can have far-reaching effects on whether you have to pay taxes on the money you get. Work with your lawyer to specify how your settlement amount is allocated between different types of damages. With your attorney’s guidance and support, you can maximize the non-taxable portion of your settlement.
It helps to have a qualified tax professional on your side as you evaluate your taxes on a personal injury settlement. This professional will communicate and collaborate with you and your lawyer as your attorney negotiates your settlement. They can provide insights into a settlement offer’s tax implications as you decide whether to approve the proposal.
Keep copies of all documents relating to your personal injury settlement. If you don’t, you may not have the documents that the IRS needs to verify that your settlement is non-taxable. On the other hand, if you have these documents and the IRS questions your tax return, you will have no trouble providing the necessary information to confirm your settlement’s non-taxable portion.
The Bottom Line on Whether You Have to Pay Taxes on a Personal Injury Settlement
If you accept an initial personal injury settlement offer, you may have to deal with significant tax implications. Ask for legal help as you negotiate a settlement. Your personal injury attorney will handle your settlement negotiations and position you to get an offer that provides you with enough money to cover all of your losses.
Premier Law Group has recovered over $100 million in compensation for our clients. Our attorneys can negotiate a personal injury settlement on your behalf and will consider the tax implications of any offer you receive. For more information, request a consultation with us.
Jason at premier law group is truly an outstanding individual. Our particular case was not something that their firm usually sees but they were more than willing to help us and give us all of the information they had available. I can't recommend them enough.