Those who have been hurt in an accident that was caused by someone else's wrongdoing or negligence are entitled to compensation for their damages. However, when negotiations are reached and it's time to receive a payout, many wonder, "Is a personal injury settlement considered income?"
It's important for claimants to understand their tax liability and their obligations as US citizens. This article aims to shed light on the matter and help victims understand what the law has to say concerning personal injury settlements and taxes. can also answer questions like how are personal injury settlements paid out in Ohio?
Are Personal Injury Settlements Taxable?
The answer to this question is yes and no. Navigating taxes is no easy task, and the Internal Revenue Service (IRS) has a number of rules and laws in place that must be followed.
When approaching the matter of whether settlement income is taxable or not, claimants must remember that the IRS views the money as separate streams of income. This means that a settlement could either be taxable, non-taxable, or both taxable and non-taxable.
Overall, the majority of personal injury settlements for bodily harm that weren't already included as part of a previous tax return are not considered taxable. The emotional damage a victim suffers is likewise regarded as non-taxable if the physical injury itself leads to mental suffering.
If a person gets hurt at work and suffers from PTSD as a result, they may be entitled to compensation for the psychological distress, as the physical injury was the primary cause of it.
However, it's worth mentioning that the IRS reserves the right to assess the specifics of the case and determine whether or not a settlement qualifies as non-taxable income.
The sections below will provide more insight into the damages that are typically considered taxable and non-taxable.
Which Damages Are Considered Non-taxable Income?
It's important that claimants understand which damages are considered taxable and which are not. The following portions of a personal injury settlement are generally considered non-taxable:
Medical Expenses Related to the Incident
Victims will not be required to pay taxes on compensatory damages to cover their medical bills. That's because this money is intended to cover the cost of receiving medical treatment for the injuries, which is why it is generally non-taxable.
However, claimants must report income from the settlement that was intended to reimburse them for medical expenses if they took a tax deduction (which resulted in a tax benefit) for medical expenditures and later received payment for those expenses.
Non-economic Damages
As already mentioned, if the victim suffers emotional distress as a direct result of the accident in question, the compensatory damages received will not be considered taxable income.
Property Damage
Money received for property damage may be included in the settlement of a personal injury case. If a person is involved in a car crash, the compensation they receive might include the cost of repairing or replacing their vehicle. Property loss damages are often exempt from taxation.
There is one thing to remember. The surplus amount is treated as taxable income if the payout for the loss of property surpasses the anticipated loss of value.
Understanding Which Damages Awarded in a Personal Injury Case May Be Taxable
The following are typically considered taxable income:
Lost Wages
When a claimant receives compensation for income lost because of their injuries, they will have to list this income on their tax return. That's because they would have had to pay taxes on this amount if they were able to work as normal.
Interest on a Personal Injury Settlement
In some cases, a settlement may accumulate interest. This is generally considered taxable interest, and claimants must list this as income on their tax return.
Punitive Damages
Punitive damages are awarded by a court to punish the at-fault party for a wrongful act that resulted in personal physical injuries. The judge will decide how much is awarded, depending on the details of the case.
In the US, punitive damages are considered taxable income and must be listed in the section entitled "Other Income."
Compensation for Non-injury Claims
If a breach of contract is included as part of the settlement proceeds, it may count as taxable income. Other types of compensation that do not relate directly to the injury may also have to be listed as taxable income.
Are Wrongful Death Claims Taxable?
In cases where the victim passes away and is no longer around to file a personal injury lawsuit, their family may bring a wrongful death claim on their behalf.
Medical expenses accrued prior to the victim's death, income that the departed would have received, and non-economic damages are typical examples of damages in a wrongful death claim. Since this compensation is intended to compensate family members for their losses, this income isn't typically considered taxable income.
Seeking Assistance with Taxes
Understanding which damages are taxable and which are not isn’t always easy. It’s important for victims to ensure that they have the help they need.
When determining whether damages are taxable, a personal injury attorney can prove valuable in pointing victims and the family members of those lost as a result of an act of negligence or wrongdoing in the right direction. A tax advisor can also provide valuable guidance and help victims navigate the complexities of federal taxes related to personal injury settlements.
Need Help Filing an Injury Claim? A Personal Injury Lawyer Can Help!
When the negligence of another results in personal physical injuries, it's important for victims to hold the party at fault liable. The truth is that personal injury lawsuits are often complex and require the help of experienced personal injury lawyers.
Fortunately, the expert legal representatives at Schuerger Shunnarah Trial Attorneys are ready to go to war for victims. They can help with writing a reply letter to too-low settlement offer. Whether they have been injured in a car accident, pedestrian accident, dog bite, or work-related incident, the team will ensure that no stone is left unturned in the pursuit of justice.
To file a personal injury claim, victims in Cincinnati are encouraged to schedule a free consultation with a reliable attorney who is prepared to go to war for them.