A settlement payment may consist of multiple elements that have been allocated by the parties. For example, an agreement may include allocations to back pay, emotional distress, and attorneys’ fees. Generally, the IRS will not disturb an allocation if it is consistent with the substance of the settled claimsSince that’s not 100 percent clear, let’s dive into the finer details.
Things you need to know about injury settlements and taxes in FloridaThe process of determining your tax liability, as it relates to a Florida personal injury settlement, is easier said than done. There are many circumstances to consider, including:
Physical injuries or physical sickness
- If you receive a settlement for personal physical injuries or physical sickness and did not itemize deductions for medical expenses related to the injury or sickness in the previous years, the full amount is non-taxable.
- If you receive a settlement for personal physical injuries or physical sickness, you must include in your income that portion of the settlement that is for medical expenses deducted in the previous years (which is the opposite of above).
Emotional distress or mental anguish
- Payments you receive for emotional distress or mental anguish, which originate from a personal physical injury or physical sickness, are treated in the same manner as personal physical injuries or physical sickness.
- If the payments you receive for emotional distress or mental anguish do not originate from a personal physical injury or physical sickness, they must be included in your income. On the plus side, the amount you include can be reduced by previously deducted medical expenses and payments for medical expenses related to emotional distress or mental anguish.
What about punitive damages in a Florida injury settlement?Here’s how punitive damages are defined by the Legal Information Institute at Cornell University:
Punitive damages are considered punishment and are typically awarded at the court’s discretion when the defendant’s behavior is found to be especially harmful.Punitive damages are treated differently by the IRS, with the agency noting the following:
Punitive damages are taxable and should be reported as “Other Income” on line 21 of Form 1040, Schedule 1, even if the punitive damages were received in a settlement for personal physical injuries or physical sickness.So, if you receive punitive damages along with other forms of compensation, it’s important that you take this into consideration in regards to your injury settlement and its applicable taxes.
Questions to ask a tax professional about your injury settlementDoes all this have you confused? Are you concerned that your Florida injury settlement can wreak havoc on your finances come tax time? Rather than wait and hope for the best, consult with an experienced tax professional (preferably someone who has experience with personal injury settlements in Florida). They can help you take action now, such as by making quarterly payments. When doing so, ask questions such as:
- What type of information and documentation do you need from me?
- Is any of the money I received taxable?
- How does the IRS determine what is and isn’t taxable?
- What impact does the injury settlement have on other taxes that I may have to pay?