Do I Have to Pay Tax on a Personal Injury Settlement?
When tax season arrives, individuals and businesses must settle their accounts with the IRS or file for an extension. If you received a personal injury settlement last year, you might wonder, “Do I have to pay income tax on a personal injury settlement?” The answer isn’t always clear. To help you prepare for tax filing, the Kansas personal injury attorneys at Patterson Legal Group explain which parts of a settlement are taxable and which are not.
Understanding the Tax Implications of a Personal Injury Settlement
Understanding tax implications if you’ve received a personal injury settlement can be overwhelming. Many people get confused by federal and state tax codes in a normal year. Adding a sizable settlement to the mix can make things more confusing. Patterson Legal Group clarifies what is and isn’t typically taxable when it comes to these settlements, helping ease your tax season stress.
Portions of an Injury Settlement That Are Usually Not Taxable
1. Compensation for Physical Injuries or Sickness
If a personal injury settlement is related to physical injuries or sickness, it is usually not taxable. This includes your compensation for:
- Medical expenses (e.g., hospital bills, surgeries, medications)
- Pain and suffering directly related to the physical injury
- Other damages that stem from the physical harm you endured
Compensation for losses is not considered financial gain by the IRS. Therefore, this money is not included as part of your taxable income.
2. Emotional Distress Related to Physical Injury
Compensation for emotional distress is generally not taxable if it is a direct cause of a physical injury. If you suffer anxiety or depression due to an accident at work or in a vehicle, any settlement offered is usually tax-free.
Parts of a Personal Injury Settlement That May Be Taxable
While the majority of a personal injury settlement can be tax-free, there are exceptions. You may have to pay income tax on a personal injury settlement for the portion of your compensation that includes money for:
1. Punitive Damages
Punitive damages are intended to penalize the defendant for their outrageous actions, not to compensate you for your losses. As such, they are almost always subject to taxation.
2. Lost Wages
If your settlement compensates you for lost wages or lost earning capacity, that part of the settlement is generally considered taxable income, since wages are normally subject to income tax.
3. Interest
If your settlement accrues interest during processing or while being held, that interest is generally taxable. For example, if it takes several months for your settlement to be finalized, any interest earned during that period would be subject to taxes.
4. Emotional Distress Not Related to Physical Injury
Compensation for emotional distress may be taxable if it is not related to a physical injury. For example, damages awarded for emotional distress due to defamation or harassment could be subject to taxes.
5. Medical Expenses Previously Deducted
If you receive a settlement reimbursing medical expenses that you previously claimed as a tax deduction, that reimbursement may be taxable. This prevents you from receiving both a tax deduction and a tax-free reimbursement for the same expense.
Contact a Kansas Injury Attorney
Understanding the tax implications of a personal injury settlement and seeking professional guidance can help you avoid unexpected tax liabilities and retain as much of your settlement as possible. The Kansas injury lawyers at Patterson Legal Group hope this information on incoming tax on a personal injury settlement has been helpful to you.
Naturally, you should consult with your accountant or tax preparer to get help with your specific financial situation. Should you suffer any injuries in a Kansas, Missouri, Oklahoma, or Colorado accident, Patterson Legal Group is available to help you 24 hours a day, 7 days a week.
You can reach our Missouri injury attorneys by phone at 888-687-2400 and online through our secure contact form or by connecting with our LiveChat agents. Patterson Legal Group has helped thousands of injury victims receive maximum compensation. Our experienced trial lawyers have recovered more than $250-million in settlements for our clients. Reach out to us today and take the first step towards the compensation that you’re entitled to.
