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Are Personal Injury Settlements Taxable?

Posted by Trent Kelly on June 27, 2022
Are Personal Injury Settlements Taxable?

Many people who obtain settlements in personal injury cases have enormous concerns about their potential tax liability. When you need help navigating these types of issues, make sure to contact an Austin personal injury lawyer.

People who receive settlements after a car accident or another injury are dealing with these kinds of concerns when they are filing their taxes for the year and trying to determine whether a settlement counts as taxable income. Here are some of the times settlements count towards income and the times they do not.

When Personal Injury Settlements Are Not Income

When you receive a settlement for injuries or illness, it is generally not taxable income. This includes compensation for medical bills, lost wages, and other financial losses. Most people do not have to report their settlement proceeds to the IRS and do not have additional tax liability due to the settlement.

The IRS treats proceeds for emotional distress or mental anguish from a personal injury the same as compensation for financial losses, meaning you do not include the settlement proceeds in your income. However, if you receive a settlement for emotional distress that is not connected with a physical injury, you might have a tax liability on some of that settlement.

When Personal Injury Settlements Are Income

You might have to report settlement proceeds that reimburse you for certain medical expenses. For example, if you previously took a tax deduction for paying your injury-related medical bills out of pocket, you cannot then get reimbursed for those payments without tax implications. In this situation, you will need to report any previously-deducted medical bill compensation as taxable income.

As mentioned, you must include any proceeds you receive for emotional distress or mental anguish not originating from an injury or illness on your tax returns. The amount you have is usually lower than the amount you received. You can deduct the cost of medical care for your distress that you did not previously use as a deduction or receive a tax benefit for.

If you receive punitive damages as part of a jury award, that portion of your proceeds will be taxable, and you must report it on your tax return. Punitive damages are rare, however, and do not reimburse you for any financial losses. This means that paying taxes on this recovery can still leave you far ahead financially than before your award.

Schedule a Free Consultation with an Austin Personal Injury Lawyer

You will want to be sure that you are complying with all state and federal tax laws when you obtain any settlement. If you need help figuring out what taxes to pay in relation to a personal injury settlement, get legal representation. Contact TK Injury Lawyers for assistance navigating this complex area of the law. We can address any questions and concerns you may have about the injury claim process.

Call us at (512) 982-9713 or contact us online to receive a free consultation so we can further discuss how to handle your case.

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