Taxes on Legal Settlements
Settlements and judgments in personal injury cases, depending on the severity of the injury, can be substantial. Some people think that large payments are always taxed, such as lottery winnings that seem to be cut in half after being claimed, but this is not always true. If you have suffered an injury as a result of someone else’s negligence, you should never let the fear of taxes stop you from pursuing the compensation you deserve.
Taxes On Personal Injury Settlements and Judgements
We are not tax experts and would advise you to speak with a tax attorney or licensed accountant before following any advice in this article. Now, since Florida has no state income tax, almost all of our concern today is regarding the IRS and federal taxes. Luckily, the IRS has specific guidelines that shine a light on whether or not income from personal injury lawsuits is taxable.
To start, the IRS says that every dollar you receive is subject to taxes unless an exception exists. Now that we know this, we can look for the exception to this rule that applies to personal injuries, which is found here. This exception states that gross income does not include the following:
- Money received under worker’s compensation due to injuries
- Money received from settlements or judgments due to personal injuries
- Money received through accident or health insurance for personal injuries
This means that the IRS does not seem interested in taxing money you receive as damages for a personal injury suit. When you receive compensation for physical pains, medical costs, emotional distress, and other issues directly resulting from your injury, this income is tax-free.
However, you are expected to pay taxes in a few other scenarios, namely when you receive money not as a direct result of the injury. The most common example is punitive damages. Juries can award punitive damages to you in court if they want to punish the negligent party for their actions, but this money is not intended to relate directly to your injury, pain, or suffering. Another example is emotional damages, which are only tax-free if they are a direct result of an accident.
Reasoning Behind Tax-Free Settlements and Judgements
As you can see, the IRS emphasizes the income you receive as a direct result of an injury and lets you keep that money without paying taxes. The reasoning is simple – compensation received due to a personal injury is intended to ‘make you whole’ following an accident. While money cannot fix everything, it is the only method through which the court can attempt to right a wrong in these situations.
As an example, imagine you lost the use of your leg due to someone else’s negligence and received a total judgment of one million dollars as compensation. The court decided that your leg – its loss, your future hardships, and pain as a result of losing it – is ‘worth’ 1 million dollars, and this payment is bringing your life back into balance.
Lawyer Fees: Most personal injury lawyers work on a contingency fee, and you will have to pay them a certain percentage of the payout if you win your case. Because your compensation is not taxed, and additional money from methods such as punitive damages is ‘extra,’ it is impossible to end up in a situation where you cannot pay any bills or tax burdens after a case if your lawyers successfully fought on your behalf to cover any existing medical bills and loss of income.
Contact Hale Law today to learn how we can fight for you in your personal injury case. Our consultations are safe and secure and represent no financial risk to you. We never receive money unless we win your case or secure a settlement.