When it comes to personal injury settlements, one of the most frequently asked questions is, “Do I have to pay tax on this compensation?” Then when tax season comes around the corner, many people ask, “Do I have to declare my personal injury settlement on my tax return?”
The short answer to these questions is, “No.”
The IRS or the state cannot tax you on personal injury claims, whether or not you reached a settlement without going to court or went to trial and won a verdict. Therefore, a significant portion of the compensation from a typical personal injury case that is meant to pay for medical expenses, lost wages, pain and suffering and attorney fees will not be taxed, provided they are directly traceable to the relevant injury or illness-causing accident. According to the Income Tax Assessment Act, a lump sum payment in relation to a personal injury lawsuit does not have to be noted on your tax return as taxable income.
However, there are some exceptions.
For instance, punitive damages are always taxable. In the event you are awarded punitive damages for your claim, your attorney will request that the compensatory damages and punitive damages remain separate, so you can prove to the IRS that part of the verdict was for compensatory damages, which are not taxable.
Additionally, damages for emotional distress that is not directly linked to a physical injury or illness from an accident are more than likely taxable. This commonly occurs in claims involving harassment, discrimination, or wrongful termination.
In some cases, those who end up paying for medical bills out of pocket, while waiting for a pending claim, may take the associated tax deduction. So when their claim is settled, the settlement included reimbursement from the insurance company for those medical costs. Since it’s not money to reimburse you for your injuries or pain and suffering, this calculated amount is then considered taxable income because the funds are reimbursement for the money you paid to medical providers.
Due to the complexities of personal injury cases, it is critical to retain experienced legal consultation from a qualified lawyer to help you navigate through the intricacies of the law. With millions of dollars in verdicts and settlements over the years, our Nassau County personal injury attorneys at Foley Griffin, LLP have a thorough understanding of New York law to help you obtain the most favorable outcome possible.
For more information, contact us and request a free consultation today.