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Are Personal Injury Settlements Taxable?

Are Personal Injury Settlements Taxable?

If you are involved in an accident, and it is determined to be someone else’s fault, you may recover compensation for your losses and damages. Hiring a CT personal injury lawyer from Jonathan Perkins Injury Lawyers is a great first step in this process and will ensure that you get the maximum compensation you are entitled to.

However, after you receive your settlement check, you may wonder – is your settlement taxable?

Personal injury settlements are tax-exempt. These are one of the few types of lawsuits that are not taxed.

Related Article: What Are the Three Types of Damages in a Personal Injury Case?

What Does the IRS Say?

According to the IRS, you can legally exclude any personal injury settlement from your gross income when you file taxes.

It is also worth noting that the tax-free status applies to periodic payments of your settlement or if you accept a lump sum payment.

Factors That Determine Tax-Exempt vs. Taxable Personal Injury Settlements

In personal injury settlements, there are some exceptions to the tax-exempt rule. It typically determines the type of compensation you receive. For example:

  • Damages: You can receive damages for mental anguish and emotional distress, which are awarded tax-free when they are linked to an injury or physical sickness.
  • Lost Wages: When you receive payment for your lost wages, they must be claimed as income. This is the case even if the lost wages are due to a personal injury.
  • Punitive Damages: These damages are not tax-exempt. This is true even if they are awarded as part of your personal injury settlement.

Related Article: What Makes a Connecticut Personal Injury Case Complex?

Understanding Taxable Punitive Damages

In a personal injury lawsuit, you can receive compensatory damages for your medical costs, lost wages, and more. The goal of these is to compensate for the financial losses you sustained due to the accident and injuries.

When discussing tax relief, the IRS has drawn a line between awards of compensatory damages and punitive damages. One reason for this is that compensatory damages essentially pay you back for the losses you experienced.

Based on IRS rules and regulations, personal injury victims have experienced a loss that is equal to their compensated gain in the form of damages. This means accident victims are not receiving any net gain, and therefore they do not receive any taxable income.

Unlike compensatory damages that are designed to cover the costs of the accident and your injuries, punitive damages are awarded in personal injury cases where reckless, wanton, or willful behavior occurred that caused your injuries or a loved one’s death.

If you are awarded punitive damages as part of your personal injury settlement, they are being given as a type of punishment for the defendant’s wrongful act. They are not designed to compensate you for anything.

While punitive damages are rare, they may be given in addition to the compensatory damages mentioned above.

In most situations, any punitive damages you receive will be taxed, and compensatory damages will not. However, the IRS has issued warnings that this is not a rule that always applies to personal injury claims. The origin of the claim plays a role in what damages are and are not taxable too.

Related Article: What Qualifies as a Personal Injury Lawsuit?

Not-Taxable Settlement Types

Many different types of cases are considered personal injury claims. In most situations, these are not taxable. Examples of these cases include the following:

    • Premises liability cases. This type of case occurs when a property owner or occupier is negligent and leaves hazardous conditions on-site that result in injuries. An example would be an icy walkway that results in a slip and fall injury.
    • Dog attacks and bites. Connecticut is a strict liability state, which means that victims can recover damages from the owner of the offending dog.
    • Medical malpractice suits. These are based on someone’s physical sickness or illness caused by a medical professional’s negligence.
    • Motor vehicle accidents (MVAs). This relates to physical injury, not property damage.
    • Wrongful death cases.
  • Workplace and construction injuries. 
  • Defective medications. An example would be a drug with a side effect that results in significant harm.

Taxes and Wrongful Death Claims

A wrongful death claim is a type of personal injury lawsuit that is filed on behalf of family members after a wrongful act, defect, or neglect results in the loss of life. In these situations, the court may compensate families for the loss of financial support and the victim’s pain and suffering before death. Compensation can also include coverage for the loss of future inheritance, funeral costs, and medical expenses.

These types of compensatory damages are not included as income for the victim’s family; however, as stated above, punitive damages that may be awarded are usually taxable.

Other Types of Non-Taxable Settlements

There are other types of non-taxable settlements you may receive, too. These include the following:

Workman’s Compensation Claims

Usually, workman’s compensation or workers’ compensation awards won’t be taxable. This is true at the federal and state level.

The tax break provided in these cases includes any award issued to survivors if the worker dies due to their injury or illness.

While this is true, there are some exceptions to this no-tax rule, which include the following:

  • Situations where the recipient deducted medical costs from a related injury or occupational illness in the past.
  • Interest that is paid on the workers’ compensation award.
  • Retirement benefits that are paid even in situations where the worker’s retirement was caused by an injury.
  • Related Article: What does a Personal Injury Lawyer Do?

Types of Taxable Settlements

While there are several types of non-taxable personal injury settlements you can receive, there are also taxable settlements. Knowing these will help you know what to expect if you receive one.

Settlements Paid for Lost Wages

As mentioned above, you may receive compensation for lost wages in a personal injury claim. You will find that wages are a common factor in personal injury cases where you cannot go back to work immediately or in employment-related lawsuits.

Usually, these settlement amounts are taxable.

Related Article: What is a Fair Settlement for Pain and Suffering?

Criminal Justice Awards

If you receive a criminal justice award that does not involve any injury, it will be taxable (and considered taxable by the IRS).

An example of this is an armed robber who damages the store of their victim during their crime but does not cause any injuries. In these situations, the store owner may be awarded a settlement to repair their store. These funds are not tax-exempt.

A victim may also receive restitution for the consequences of a crime. In some cases, this includes things like medical costs, damaged property, and lost wages.

However, what many people do not realize is that restitution is not the same thing as damages that are awarded as a part of a civil lawsuit. In fact, a victim can receive restitution and civil suit damages. The restitution that is awarded is usually not taxed.

Cases of Emotional Distress

Situations like home intrusions can result in victims experiencing emotional distress. Common symptoms of this type of distress include stomachaches and headaches (to name a few). While these are physical symptoms, they are not visible. This is the factor that makes the damages received for this taxable.

According to the IRS, any settlement awarded for damages that are not visible, which includes those of emotional suffering, will be taxed.

The exception to this is if the emotional distress is connected to a physical injury or sickness. An example would be an MVA that results in multiple broken bones but also causes an anxiety or stress disorder. The disorder will not be taxed because of the physical injury – the broken bones – in this situation.

Medical costs that result from emotional distress of any type will be tax-exempt. This often includes the costs of counseling.

Related Article: Can Witnesses Be Forced to Testify in Personal Injury Cases?

Is Your Personal Injury Settlement Taxable?

As you can see, several factors go into determining if your personal injury settlement is taxable. Keep the information here in mind to know if you will have to report and pay taxes on the settlement you receive.

If you need help or information about this or have questions, a CT personal injury lawyer from Jonathan Perkins Injury Lawyers will be happy to help. You can also call the office to schedule a consultation to learn about all your legal rights and options.

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