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How Is Money from a Personal Injury Lawsuit Taxed?

How Is Money from a Personal Injury Lawsuit Taxed?

After suffering an injury in an accident caused by another person or party, hiring an attorney, and going to court, it may feel like you will never receive the settlement check. You likely have bills that need to be paid and other arrangements that depend on receiving the money you were awarded from your personal injury lawsuit.

However, before making plans for all the money you were awarded in your settlement claim, speak to your Bridgeport personal injury lawyer and a tax professional to determine how much the settlement will go to taxes.

You may also wonder – is your personal injury settlement taxable?

This is a good question and one our legal team at Jonathan Perkins Injury Lawyers gets often. Here you can find the answer to this question and other information about taxes on a personal injury settlement.

Taxes and Personal Injury Settlements: What You Need to Know

The bad news is that there is no black-and-white answer to the question – is my personal injury settlement taxable? The IRS has issued a general statement that damages you receive from personal injuries are not considered taxable income. The same applies to Connecticut state taxes.

You must realize that there are many limitations and exceptions to the general statement above. Sometimes, you will have a rather large tax bill on your hands.

Disfigurement, Emotional Distress, Personal Injury

If you receive a personal injury settlement related to any of the following, the IRS does not require you to pay any taxes on it:

  • Mental anguish
  • Physical injuries
  • Emotional distress
  • Sickness
  • Loss of enjoyment of life
  • Diminished quality of life
  • Disfigurement or scarring

In many personal injury cases, the damages will make up a huge part of the settlement. The IRS has stated that they do not count income and that it does not have to be reported on your tax return.

Medical Expenses

The total damages paid for personal injury settlements may be calculated based on the medical costs you have incurred and what you expect to pay for medical treatment in the future.

If you have already paid some medical costs and deducted these from your taxes, you may have to account for that part of the settlement as past deductions when you receive your settlement check. This is the case for the following:

  • Rehabilitative, occupational, and physical therapy
  • Counseling
  • Hospital bills and doctors
  • Mental health treatments
  • Medications
  • Medical equipment

If the medical costs extend for over one year, you must allocate the deductions for every year and add them as “other income” on your tax return.

Lost Wages and Future Earnings

Sometimes, a personal injury settlement will also include compensation for the time you took off work because of your injuries. Suppose you have experienced significant or ongoing injuries. In that case, it may also include your disability damages that consider future earnings you would have earned if you were not involved in an accident.

According to the IRS, future earnings, lost profits, and wages are all considered income. It is necessary to separate this portion of your settlement and report it as income for the tax year you receive the money.

Personal Injury Attorney Fees

According to information from the IRS, you are not permitted to claim any deductions for legal fees that are related to personal matters, including your personal injury lawsuit.

If your car accident lawyer works on a contingency fee, the firm can keep a part of the verdict or settlement. While this is true, you must still calculate the reportable income from the total amount rather than the smaller amount you have received once your attorney receives their payment.

Property Damage or Loss in Value

You may receive some money for any property damage. For example, if you’re injured in your car and need a Connecticut car accident lawyer, they will work to assure that you receive compensation for replacing or repairing your vehicle. This is when the tax situation will become more complicated. It is best to contact your attorney to learn more about what to expect regarding the taxes you must pay.

Our Legal Team Can Help with the Taxes Related to Your Personal Injury Claim

When you receive a settlement for your personal injury claim, you have to consider if taxes will be charged. Knowing what to expect and what must be paid is necessary.

Our legal team at Jonathan Perkins Injury Lawyers can help you understand your tax obligations and ensure they are paid in full. This will help you avoid issues with the IRS down the road. Contact us today for a free consultation.

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