Receiving a settlement from a personal injury case brings relief but raises an important question: Is this money taxable? The tax implications of your settlement can have a significant impact on your financial landscape.
This guide, crafted specifically for Zara Injury Law clients, delves into the tax status of personal injury settlements. Our Denver personal injury attorneys are here to equip you with the crucial knowledge to navigate your financial future effectively after obtaining a settlement.
Understanding the taxability of personal injury settlements
The taxability of personal injury settlements in the United States primarily depends on the type of damages awarded and the purpose of the settlement. Here’s a detailed breakdown.
Compensation for physical injuries or sickness
According to the IRS, the full amount is non-taxable if you receive a settlement for personal physical injuries or physical sickness and did not take an itemized deduction for medical expenses related to the injury in previous years. This rule applies as long as the settlement compensates you for medical costs, pain and suffering, and loss of income due to physical injury or sickness.
Exception to the rule
If you did deduct medical expenses related to the injury on your tax return in prior years, that portion of the settlement meant to reimburse those expenses may be taxable.
Emotional distress or mental anguish
Settlements for emotional distress or mental anguish are taxable unless they originate from a personal physical injury or sickness. If the emotional distress or mental anguish proceeds do not stem from a physical injury and are instead the result of employment disputes or similar, they are taxable.
If part of the settlement is explicitly allocated to cover medical costs for emotional distress or mental anguish not related to a physical injury, that portion is non-taxable.
Punitive damages
Any punitive damages received, which are intended to punish the defendant rather than compensate the victim for losses, are taxable. The IRS requires these to be reported as “Other Income” on your tax return, regardless of whether they relate to a physical injury.
Interest on the settlement
Interest on the settlement amount, which can accrue if there is a delay in payment, is taxable. This is considered interest income and must be reported on your tax return.
How Zara Injury Law can help
Navigating the complexities of what portions of a personal injury settlement are taxable can be challenging. The experienced attorneys at Zara Injury Law can guide you through the specifics of your settlement, helping you understand how it will impact your taxes. Our comprehensive legal advice lets you plan more effectively for your financial future after receiving a personal injury settlement.
Contact us for personalized advice
The question, “Are personal injury settlements taxable?” can have different answers based on the settlement’s nature and your case’s details. By understanding these nuances, you can better prepare for the financial implications of your settlement. For personalized advice and legal representation that considers your immediate needs and long-term financial health, consider partnering with Zara Injury Law. We are committed to ensuring that every aspect of your personal injury claim, including potential tax consequences, is handled with expert care and attention.