Generally speaking, all income that you make is taxable. However, there may be an exception for personal injury settlements in some situations. The reason that you received the settlement will impact the taxability of the settlement.
Let’s Get Personal.
If you received a settlement based on your personal injuries, you can exclude the amount from your income. However, you can only do this if you did not take an itemized deduction for the medical expenses related to the injury in prior years. Thankfully, this situation applies to most taxpayers, so most personal injury settlements will not be taxable.
If you did itemize the medical expenses, then only a portion of the settlement is non-taxable. If the itemization gave you a tax benefit in prior years, then must include the amount of the benefit as income when you receive your settlement.
Too Many Emotions!
In many personal injury cases, you may have been awarded a portion of the settlement for emotional distress or mental anguish. Generally, these are treated in the same way as awards for personal physical injuries. If the mental anguish does not originate from the injury, however, it may have a different tax treatment.
Lost and Found
If you are unable to return to work while you recover from an injury or illness, you may be awarded lost wages. In most situations, the amount that you receive to compensate you for lost wages is taxable just as if you had earned the wage. It is also subject to other normal withholdings, such as Medicare, Social Security, state tax, and so on.
If you had property that was damaged, settlements for this property damage are generally not taxable. If you still have the property, you would reduce your tax basis on the property by the amount of the settlement.
If you are awarded punitive damages (damages that are designed to “punish” the wrongdoer), then this award will be taxable. Interest on a settlement is considered income and fully taxable.
Attorney’s fees associated with most personal injury cases are usually non-taxable.
Tax considerations are important when designing a settlement. An experienced personal injury attorney Jupiter can help you craft a settlement that will be sure that you pay as little in tax as possible.
If you have been injured, talk to an attorney before your settle on your own. The experienced professionals at Fetterman & Associates, PA can help. Call (561)-845-2510 today!
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