Do I need to Pay Taxes on A Personal Injury Settlement?
Attorneys at all Naples law firms will tell you that the bulk of personal injury cases are settled before trial. Acceptance of a settlement is fairly simple- once you tell your attorney you’re agreeable to the defense attorney’s offer, your lawyer will help you handle the rest.
The check should be on the way shortly. Once your lawyer’s contingency fees are paid you can get back to living your life.
But what about taxes?
The good news is that settlement funds that are received as part of a personal injury case are not taxable under state or federal law. This holds true regardless as to whether you settled early or if you chose to take the case to trial.
Personal injury damages that meant to compensate for the following things aren’t taxable:
- Attorney’s fees
- Lost wages
- Pain and suffering
- Medical bills
- Emotional distress
- Loss of consortium
Are there any exceptions to this rule?
Yes, there exceptions to the general rule. For example, if your settlement includes punitive damages, those monies will be taxable.
If you’re pursuing punitive damages, be sure to ask your personal injury attorney to have your total award split so you’ll have separate agreements and/or judgments for punitive damages and compensatory damages.
This will help you keep everything straight with the IRS.
You should also know that interest on monies that owed to you as a result of a personal injury claim are also taxable.
For example- if you filed your claim in August 2016 but your case didn’t settle until the following year, and the defendant appealed (and lost) in August 2018, you would be entitled to two years-worth of interest.
Remember, if you use the above example, you can rest easy in knowing that your overall compensatory damages won’t be taxed, but the interest that accrued between the time you filed your case and the time you received your settlement will be.
If you have more than one claim against the defendant, be sure to have your Naples law firm request that the details of the settlement be fully outlined in the settlement agreement.
This will allow the courts (and the IRS) to know which portion of your settlement relates to a personal injury claim in addition to outlining the part of your settlement that relates to a non-personal injury claim.
If you have questions about how personal injury lawsuits work, call our office today at 239-649-8050 to schedule a free consultation.