Are Personal Injury Settlements Taxable?

Aug 15, 2018 — by Gary Zucker
Tags: Personal Injury Settlements

Calculating income and crunching numbersThe vast majority of personal injury cases settle out of court. This is a good thing. If all cases went to trial, the legal system would be backed up with thousands of cases, meaning long delays for clients seeking some form of justice for the harm visited upon them. Our Brooklyn, NY personal injury lawyers always consider going to trial, but we may advise our clients to accept a settlement so long as the terms are agreeable and advantageous to the client.

That said, there are a number of questions regarding legal settlements and if that money is subjects to state and federal taxes. The answer is not as straightforward as you might expect. Our legal team considers this issue and how lawyers can help below.

Personal Injury Claims Are Generally Not Taxable

Generally speaking, the money received from a personal injury claim are usually not subject to state or federal taxes. This applies to both legal settlements as well as damages from jury verdicts in a trial. As long as the amounts received are linked to physical injury or physical illness, the money received is not taxable. That includes amounts related to the following:

  • Attorney fees
  • Medical bills
  • Lost wages
  • Loss of consortium
  • Damage to property
  • Emotional pain and suffering

However, this is where things get a little complicated.

Exception: Purely Emotional Injuries Are Taxable

As you may have noticed, physical illness and injury are crucial for non-taxable status. If a person suffered a purely emotional injury or emotional distress from an accident, any amount received from the case would be taxable.

Exception: Breach of Contract

If you case is over a breach of contract, any money received from the claim is likely subject to taxes. Even if the breach of contract resulted in some form of physical injury, the claim itself is focused more on the contract per se rather than physical harm per se.

Exception: Punitive Damages Are Taxable

If your case goes to trial and you are award punitive damages, these damages are taxable. Punitive damages are always sought in excess of actual material losses covered by punitive damages. Since these damages are not related directly to the costs of the physical harm suffered, they are taxable.

Determining If Part of Your Settlement Is Taxable

As part of working with an attorney, we can discuss whether or not your settlement or verdict is subject to state or federal taxes. If there are taxes involved, we can offer advice on tax planning for the following year, and what you should consider while filing your income tax return.

Our lawyers always want to make legal issues clear to our clients. We will be more than happy to discuss these matters with you so you have peace of mind with the legal process.

Learn More About Your Legal Rights and Options

For more information about your legal rights and options, be sure to contact our team of injury accident attorneys. We will discuss these matters with you in full detail to help make sense of the legal process and other related issues.

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