Is My Personal Injury Insurance Settlement Taxable?
Is My Personal Injury Insurance Settlement Taxable?
If you’re depending on a personal injury settlement to cover the costs of catastrophic injuries, emotional distress, lost wages, or medical bills, the last thing you want to worry about is if your injury insurance settlements are taxable. Unfortunately, this sort of confusion is common, especially if you’re recovering from a traumatic, life-changing event.
So, today, we’re going to answer the question: “Are injury insurance settlements taxable?” Keep reading to learn the general rule when it comes to paying taxes on this sort of compensation, as well as a few of the most common exceptions.
Most Plaintiffs Don’t Pay Taxes on Personal Injury Settlements
Generally speaking, personal injury settlements are non-taxable. If you did not file an itemized deduction for the cost of medical expenses related to your injury, you do not need to include the proceeds you received from the settlement in your income when you file your taxes.
However, there are several exceptions to this rule that are important to know in order to file your taxes correctly.
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When Is Personal Injury Compensation Taxable?
Compensatory damages are not taxable, but there are three common exceptions to the rule. Before you rush to file your taxes, you should understand what you can and cannot claim as income after receiving a personal injury settlement.
Exception #1: You Received Punitive Damages
Punitive damages are meant to deter the defendant or others from the activity that caused the injury that formed the basis of the lawsuit. Rather than covering medical bills or lost income, punitive damages punish the liable party for their negligence. However, because of the unique nature of these damages, they are subject to personal income tax.
Exception #2: Your Injuries Were a Result of a Breach of Contract
If your injuries are related to a breach of contract, the compensation you receive in a settlement is considered taxable. If you have questions about your specific situation and whether you’d need to pay taxes on a settlement, you should contact a skilled and experienced attorney right away.
Exception #3: Your Personal Injury Verdict Award Amount Included Interest
Settlement agreements are not eligible to collect interest. What many people don’t know, however, is that a verdict award can accrue interest if it takes a long time to resolve. For example, if you file a lawsuit in 2019, but it takes two years to receive a verdict in court, that initial amount could include additional interest upon payout. The IRS considers this interest as taxable income.
Understanding if you’re eligible to collect interest on top of your jury award and then calculating that amount can be complex. If you find yourself in this situation, your lawyer will help you calculate the interest amount. Your account will then need to advise you on what to do when it comes to filing your taxes.
Any taxes you do or do not need to pay (exceptions included) will depend on your unique situation. While the experienced Charlotte personal injury lawyers at Myers Law Firm will help you obtain the best possible result in your personal injury case, you should contact an accountant about your specific tax questions.
Myers Law Firm: Personal Injury Attorneys Serving North Carolina Families for Over 40 Years
If you or someone you love has been hurt by a negligent party person or party, please contact Myers Law Firm. We’re proud of our decades-long track record of helping people understand and navigate the legal process — including the nuances of expenses, taxes, and other complex details.
We know how challenging it can be to recover from devastating injuries and steep medical costs, which is why we treat everyone with empathy, respect, and dignity. If you’re ready to get started, you can request a one-on-one meeting with a member of our team to learn more about your options and get sound legal advice. These consultations are always free and completely confidential.
The content provided here is for informational purposes only and should not be construed as legal advice on any subject.