Just about any financial gain you can imagine will come under the scrutiny of the IRS, and the proceeds of a personal injury suit is no exception. Part of your award may be provided to you tax free, but other parts are considered taxable. Read on for a explanation of the different types of damages often awarded in personal injury cases and how the money you get is treated by the IRS.
Settlement or Lawsuit?
When it comes to getting monetary compensation for a personal injury, you can expect to either be paid as a result of a settlement outside of court or as a result of a court judgment after a trial. For tax purposes, it makes no difference how the money was awarded. It is the particular type of damages that matters for tax purposes. Additionally, the below information refers to both federal and state taxes.
Types of damages
1. Physical injury or illness: Whether you get hurt in a car accident or ingest tainted food, all physical injuries or sickness injury awards are completely exempt from taxation. Therefore, this money should not be reported as income. In the physical injury or illness category, you can also include compensation for the following, all of which are non-taxable:
- Pain and suffering
- Loss of consortium
- Emotional distress
- Lost wages
- Medical bills, both past and future
- Attorney fees
It must be pointed out that for these monetary damages to be tax free, the damage must have resulted from a physical injury or illness. For example, the emotional distress must be the result of a physical issue, and not just from a bad experience in general.
2. Breach of Contract: If you are suing for damages that resulted from breach of contract, even if those damages were physical, the settlement funds are taxable.
3. Punitive Damages: There are two general types of damages when you consider personal injury; compensatory and punitive. Compensatory is the actual dollar amount you incurred for a wrecked car, medical bills, or other finite damages. Punitive damages, on the other hand, are in a separate category and are meant to send a signal to the wrongdoer. You might find punitive damages in high-profile cases and cases against large corporations, but you can also find them right alongside of many ordinary personal injury cases where the circumstances warrant it. For example, with distracted driving gaining so much publicity lately, there may be punitive damages awarded against the texting driver who caused an accident on top of compensatory damages. Punitive damages, however, are taxable.
4. Interest: If your settlement garnered any interest before being paid to you, that portion is taxable.
5. Emotional distress: If you sued your employer for discrimination and were paid for any emotional distress, that is taxable, unless it is connected to a physical injury.
Your personal injury attorney will take taxes into consideration when forming the lawsuit, and in some cases you can save thousands of dollars just by assigning damages to certain non-taxable categories. For more information, contact companies like Philpot Law Firm Pa.