Personal Injury cases are quite common in America, with most cases settling for compensation outside the court. Victims usually get compensated for the economic losses they incur due to personal injury, such as medical expenses, lost wages, job loss, property damages, etc. In some cases, victims are also compensated for non-economic losses such as tarnished social reputation, mental trauma, etc.
The victim is not liable to pay taxes on a personal injury settlement in most cases. This is the case when the settlement money compensates the victim for back income pay, lawyer’s fee, emotional trauma, sickness or illness resulting from the injury, or payment for impairment or disability.
However, the victim may be liable to file a tax return and classify deductions for the expenses incurred for the medical treatment. All non-taxable income provided through the settlement may need to be filled out and reported in a few tax sections. When itemizing tax deductions, the plaintiff should not include the settlement money in the income section.
Settlement money over a few years:
In cases where the victim is compensated with money for damages over the years, the victim will likely be required to include the settlement amount for personal injuries and their compensations from the previous years. If the compensation consists of medical bills for the injury incurred during the last years that the person deducted in taxes, then in future tax returns, sections may require to be filled out showing these previously deducted charges. The form also may need settlement information for multiple years if the settlement compensates for longitudinal over-the-years injury. When incurred over the years, the tax benefits should not be shown as income in the tax forms.
Types of distress:
In cases where the victim has suffered from mental or psychological injuries due to the physical injuries of the accident, the victim is entitled to use the compensation money the same way as they would to treat physical injuries and make themselves feel better again. In this case, the victim is not liable to pay tax on the compensated monies. However, in cases where the mental or psychological distress is due to the stress of the incident and not because of the physical injuries such as cases of PTSD, then the victim will need to include the compensation monies as income.
Tax on compensations for the loss of income:
The tax on settlement compensation monies largely depends on the types of damages incurred and how the victim uses that compensation money in their life. When the victim gets compensated for the loss of income due to injury, the compensation award is usually liable to tax as under normal circumstances the income is taxed; hence compensation for missed income is also taxed by this rule. Even for business owners or entities, the same system applies.
Hiring a Tax Law Attorney:
Knowing about the tax legalities of your injury settlement can often be tricky, and so can be getting the rightly deserved compensation payment. Hence, you may benefit from hiring an experienced tax law attorney who can help you file your case better and guide you with various legal issues such as tax applicable on the compensation so that you do not miss out on paying taxes.
Hemant Kumar is a project manager at Tridindia with more than nine years of commendable experience in writing about LMS, translation, and IT. His unmatched talent and passion for digital marketing gave him the opportunity to work as a multi-tasking project manager at TridIndia’s sister company, Link Building Corp. Today, he contributes to the world by imparting knowledge on SEO, link building and internet marketing etc., that helps business owners grow their online business.