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Do I Need to Pay Taxes on My Settlement?

Do I Need to Pay Taxes on My Settlement?

Around 31 million people are injured enough to require medical treatment across the United States each year. However, only about 409,000 cases are personal injury claims are made each year. Many of these personal injury cases are settled before they ever go to court—out of the 16,000, only maybe 4% reach trial. So, if your personal injury claim is settled, what happens after? Are you paid the exact amount or is it taxed as income first?

If you win compensation for a physical injury, most of the time it is not taxable under federal or state law. It doesn’t matter if the case was settled before it ever went to court. The federal government and the state can’t tax you on the settlement or verdict proceeds received as a result of personal physical injuries or sickness from a person’s gross income. These personal injury damages are meant to compensate people for things like lost wages, emotional distress, medical bills, loss of consortium, pain and suffering, and attorney’s fees.

However, you can be taxed if you suffered physical injury or sickness relating to a breach of contract. If the breach of contract caused your injury and is the basis of your lawsuit, then the settlement can be taxed. Additionally, punitive damages can always be taxable. If you have a punitive damages claim, your attorney can ask the judge or jury to separate its verdict into compensatory damages and punitive damages. This separation allows you to prove to the IRS that part of the total sum won was for compensatory damages, which are not taxable.

Another taxable portion of the verdict is interest on the judgment. Most states have court rules that add interest to the verdict for the period of time that the case has been pending. Many cases can take months, for example, and the interest is meant to compensate you for lost time. However, this interest is taxable by the IRS. Emotional injuries are also not protected from taxation. Only physical injuries are taxable unless you can prove even the slightest amount of physical damage was also caused by the accident.

If you need help determining whether or not your settlement will be taxed by the IRS, or you would like to begin a claim, contact our experienced Albuquerque personal injury attorney. He can help you through the claim-filing process or represent you in negotiation or in a trial. Michael J. Doyle is an experienced lawyer who helps people with cases involving car accidents, slip and falls, environmental cases, medical malpractice, workplace injuries, and more. Our attorney will treat you with courtesy as respect as he works to get you fair compensation for your injuries. Contact us at (505) 219-2176 or fill out our online form to schedule a case consultation with us today.


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