After a serious, injury-causing accident that resulted in significant losses, taxes are probably the last thing you want to think about. However, taxes are a reality, and legal judgments are subject to complex IRS tax rules. The good news is that, in most cases, a personal injury settlement or award will not result in additional tax liability. The following is a brief overview of tax rules regarding your injury-related settlement.
Compensation for Physical Injuries or Sickness
For the most part, compensation for losses arising from a personal physical injury or sickness is not considered to be taxable income. This can include recovery for:
While most personal injury plaintiffs get to keep their entire settlements tax-free, there are a couple of important exceptions to this rule.
First, some of your compensation for medical expenses may be taxable. While your lawsuit was pending, you may have paid for certain medical treatments out-of-pocket while you waited for your settlement check. You might have then deducted those medical expenses from your taxes in previous years. If you received a tax benefit due to the deduction, you must claim the amount of that benefit as income once you receive compensation for the deducted expenses. This can be a complicated task, especially if you deducted medical expenses in multiple years.
Additionally, damages for emotional distress and mental anguish are only tax-free if the distress stemmed from physical injuries. For instance, if you suffered a disabling spinal injury and can no longer walk, you may experience depression and other mental problems as a result. This stems from a physical injury and, therefore, you will not include thus compensation as taxable income. However, if you suffered emotional trauma for a reason other than a specific injury, that compensation may be taxed.
If someone acted particularly egregiously when they injured you, you may receive punitive damages on top of your compensatory damages. Punitive damages are always taxable. If you receive a settlement or a verdict that includes punitive damages, it is important to make sure the settlement is divided to make clear how much is compensatory and how much is punitive. You will need to include your punitive damages as taxable income on your returns.
When you have a pending personal injury case, never hesitate to discuss the issue of taxes with your lawyer. Maybe you will decide not to deduct medical expenses before receiving a settlement or take other steps that may simplify the tax process and help you keep as much compensation as possible – if not all of it.
If you have been injured in an accident caused by someone else’s negligence, it’s highly advisable that you speak to an experienced lawyer as soon as you can. To schedule a free case evaluation with a personal injury attorney in Oklahoma, call Wandres Law, PC today at (918) 641-4044 or contact us online.