In a perfect world, your life should go back to normal once you receive your personal injury settlement. But this is not usually the case, especially when the question of tax obligations arises. Are our personal injury settlements taxable? If they are, how can a North Bergen Personal Injury Attorney protect your interests?
General Rule
When you receive a personal injury settlement, the insurance company will submit a 1099 claim to the IRS. The IRS does not generally consider proceeds from a personal injury claim taxable, which is also the general rule under federal or state law. The rule applies to insurance settlement amounts as well as awards given to judges or juries.
The non-taxable rule applies to the expenses related to physical injuries caused by an accident. As such, it covers a wide range of expenses, including compensation amounts designed to cover the following:
- Medical expenses, such as ambulance costs, diagnostic tests, hospital stays, medication, and treatment
- Rehabilitation, including physical therapy, aftercare, and medical devices such as wheelchairs
- Loss of consortium
- Lost income
- Pain and suffering
- Legal fees
It is vital to note that these losses will only be considered non-taxable if related to a physical injury. For instance, emotional trauma may not be covered on its own but could be counted as non-taxable if it resulted from a spinal cord injury.
Exceptions to the Rule
As with every rule, there are exceptions to the non-taxable rule on personal injury settlements. Situations where your claim amount could be taxable include:
- Punitive Damages
Punitive damages, which are designed to punish the defendant for gross misconduct, are not directly related to a physical injury. This makes them taxable. To protect the non-taxable portion of your settlement, your personal injury attorney will usually request a separate verdict on punitive damages.
- Interest in the Verdict
In some states, courts add interest to a personal injury verdict for the duration the case has been pending. This interest, which is counted from the filing date to when you receive the settlement, is taxable.
- Work-Related Claims
If your claim involves illegal discrimination, back wages, lost income, or emotional distress at the workplace, the settlement could be taxable because it doesn’t involve physical injury.
- Breach of Contract
Your settlement could be taxable if a breach of contract caused your injury or illness, especially if your lawsuit is based on the breach.
- Tax Deductions
If you take a tax deduction on your medical treatment costs in the previous tax year, you might have to file your settlement under taxable income.
2017 Tax Law
The Trump Administration signed a tax law in 2017, which stipulates that personal injury settlements or awards are only tax-free if the injuries are physical. The law can be simplified as follows:
- If the defendant caused you to sustain a physical injury for which you filed for and received compensation, the amount is tax-exempt.
- If your claim was based on emotional distress, the settlement is taxable, even if the emotional distress causes physical symptoms.
Work with a North Bergen Personal Injury Attorney
Are our personal injury settlements taxable? While the general rule states that they are not, there are exceptions to this rule. If a dispute arises, your North Bergen Personal Injury Attorney can ensure that the largest portion of your claim amount is non-taxable.
Do you wish to discuss the taxability of your settlement? Contact attorney Anthony Carbone today at 201-829-3829.