Are Personal Injury Claims Taxable?
If you have suffered a personal injury due to someone else’s negligence, you are probably considering the impact on your finances. You may already have fought for and won a fair amount of compensation. The facts of your case will determine how much of this money remains in your hands.
Part of your award will go to your attorneys. Doctors, hospitals and other lienholders will also expect their fair share. After all the bills are paid, you will get the balance of whatever is left. Will you be able to keep it all? What portion of your personal injury settlement must go to Uncle Sam?
The answer to this question hinges upon whether or not the amount received qualifies as gross income. Not everything does. While most of your personal injury award will always be tax-free, the status of the rest depends on the specifics of your particular disbursement.
Breaking Down Your Personal Injury Settlement
In the vast majority of personal injury cases, the greatest part of the award consists of reimbursement for expenses related to case-related illness or physical injury. In some instances, this will comprise the entire settlement amount. This type of compensation is never taxable. You need never report it as income on your tax return.
There is unfortunately more to the story than this. Most personal injury awards compensate their recipients for more than simply sickness or injury. Reimbursement for things like medical bills, emotional distress, lost wages and loss of property value immediately cloud the picture while interest and punitive damages spice things up that much more.
Taxing Personal Injury Awards for Medical Bills
Normally, any portion of your settlement that aims to reimburse you for accident-related medical bills would not be considered taxable income. Sadly, that is not always the case. If you’ve already paid any of those bills out of your own pocket and previously declared them as deductions, you will have to report this particular portion of your settlement as taxable income on your next return.
There is a good reason for this. In the eyes of the Internal Revenue Service, you will have already benefitted tax-wise from these medical bills by treating them as deductions. Therefore, any failure to declare the reimbursement as income this time around will amount to benefitting twice. The IRS frowns on this.
If, however, you did not claim those medical bills as deductions in previous years, you need not declare this portion of your settlement as income.
Taxing Personal Injury Awards for Mental Anguish and Emotional Distress
In most personal injury cases, any reimbursement for emotional distress or mental anguish also falls into the non-taxable category. There are, however, exceptions, and they have to do with whether your psychological stress does or does not derive from related physical injury or illness. If they do, you are home free. If they do not, your compensation is taxable and you must report it as income.
In addition, if you have already paid medical expenses in relation to your mental and emotional damages but neglected to deduct them on a previous return, the IRS will allow you to take a credit on your next filing. You may also obtain a reduction if you did deduct these expenses but enjoyed no tax benefit from doing so.
Taxing Personal Injury Awards for Lost Wages and Loss of Property Value
If your reimbursement for lost wages relates directly to time lost from work due to sickness or injury connected to your case, you do not have to report it as income. However, if this reimbursement derives from a situation unrelated to your personal injury, it is taxable and must be reported.
Similarly, any property settlement meant as reimbursement for loss in value of your home, your car or other personal property is not considered taxable unless the amount received exceeds the property’s adjusted basis.
Tax Implications of Interest and Punitive Damages
If any portion of your award includes interest, that particular amount is always taxable. The same is true of punitive damages. In cases where your harm resulted from evil intent or malice on the part of the responsible person or entity, this type of award is meant more to punish the perpetrator than it is to reimburse you directly for your suffering. Therefore, unless the punitive damages arrive as part of a wrongful death settlement, you do benefit from that amount, and the IRS considers it to be taxable income.
Let Weiner Law Group Answer Your Questions
If you have suffered injury in any sort of accident at the hands of another person or entity, the personal injury attorneys at Weiner Law Group can help. We will not only assist you in obtaining the settlement that you deserve but also advise you on any taxation matters related to your case. Tax laws can be complicated. Please call today at 702-202-0500 for a free consultation.