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Will You have To Pay Taxes On Your Personal Injury Settlement?

MoneyTax

With a settlement or a verdict in a personal injury case comes money designed to help compensate you for the losses you’ve suffered as a result of an accident. But as you likely know, with money, comes taxes. Can the IRS tax your personal injury verdict or settlement? The answer to that question is more complex than you may think, and requires an understanding of the kinds of damages awardable in a personal injury case.

Wages, Past and Future

As a general rule, any money awarded that is intended to compensate for lost wages is taxable. That’s because your normal income that you would have earned had you not been injured would have been taxable. Since your settlement money is a replacement for this otherwise taxable money, so too is the settlement money that reimburses for lost wages.

Be aware that in cases where a large sum of money is awarded to represent future lost wages, the income can often put you in a higher tax bracket, leading to higher payments. Where there are multiple future years of lost income, your personal injury lawyer will work with you in structuring payments or finding investment opportunities that can minimize your tax burden.

Medical Expenses

The good news is that in most cases, any money that you receive that reimburses you or compensates you for medical expenses is not taxable. However, if you have previously taken a tax deduction for those expenses, then the money for medical expenses that you receive would be taxable.

The same holds true for money to fix or replace your car—you derive no benefit from this money, it is just replacing an object you have lost, so it is not taxable.

Not Economic Damages

Of course, lost wages and medical expenses are economic damages. They are quantifiable, countable expenses that you can calculate. But what about other kinds of damages, such as pain and suffering, loss of enjoyment of life, anxiety, or disability? These things don’t have a “price tag.”

The good news is that as a general rule, the IRS does not tax money that represents compensation for these kinds of injuries. However, the money must be given to compensate you for a physical injury. A settlement paying you for a breach of contract action, discrimination lawsuits, or a defamation action, for example, could be taxable. But in the personal injury arena, settlement money for non-economic damages is safe from the IRS.

The IRS will also tax for any part of your settlement or verdict that represents punitive damages-although in most settlements, the other side doesn’t agree to pay punitive damages, so this usually isn’t an issue or concern.

Avoiding a Tax Burden

If you settle your case, you may have the chance to structure a settlement to specify what part of the settlement represents compensation for what kinds of damages, in a way that is most tax advantageous to you, so long as you are doing so in good faith.

 Call the Knoxville personal injury attorneys at Fox Willis Burnette, PLLC, for help getting your personal injury case settled–or tried in court, if needed.

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