A major chunk of personal injury claims may settle during or before the trials. Upon acceptance of settlement offers from insurance companies, personal injury lawsuits are considered resolved. It leads to the signing of legal paperwork and transfer of the settlement amount directly to your bank account.
But now, the question might arise as to whether your personal injury lawsuit winnings are taxable or not. Plainly speaking, lump-sum settlements are not taxable under the Income Tax Assessment Act. However, there might be some parts within your settlement that may be entitled to State taxes. Wrongful death attorneys at Hale Law, P.A can assist you in understanding such special clauses.
Physical Injury Reimbursements Are Non-Taxable
Irrespective of settlements inside or outside the court, most personal injury claims are non-taxable by state and federal laws. Even if your claim went to court and you won a verdict, the IRS and state government might have nothing to deduct tax from such verdict proceeds for personal injuries. Damages received owing to injuries or sickness are excluded from your gross income for tax calculations by default as per existing rules. Injury claims include reimbursement against medical expenses, lost wages, attorney fees, emotional distress, and loss of consortium. Any negligent exposure to germs that may lead to sickness, impacting finances, can also call for tax-free damages as well.
The General Rule Exceptions
Breach of contracts leading to physical injuries, however, might require taxing on reimbursements. It can hold true for any personal injury claims if such a breach is established as a cause for accidents. Additionally, your claim lawsuit has to be based on such breach of contracts too. Another taxable portion of your claim might consist of any punitive damages involved. As such, your attorney might try to convince the judge to segregate punitive and compensatory damages where valid. That way, your attorney might be able to prove to the IRS that part of the verdict consisted of a compensatory portion that is non-taxable.
Some states might impose taxes on the judgment interests for injury verdicts. The period of taxable interest is usually considered from initial filing until the receipt of settlement amounts. Any delay from the defendant’s end on payment of the settlement, owing to further appeals, can entitle you to add interest on the unpaid verdict. All such interest amounts are taxable as a lump sum.
Taxation On Claim Reinvestments
It is not unusual for you to invest your settlement amount for safekeeping and earning interests. But this might require self-declaration while filing for your tax returns. Any receivable interest on your claim reinvestments might be taxable as per the law. Tax deducted at source or before being paid out to you can also be an option in reinvestments. In that case, you might still need to disclose such facts in your return too. Approaching your account managers can promptly assist you with such details when required.
Emotional Distress Awards
After-accident emotional distress as a consequence of physical injury or sickness might be part of your claim settlement. These are normally non-taxable by the laws. However, such distress or employment discrimination damages without any actual physical injury might very well add up to your taxable gross income within the country.
What About Workers’ Compensation Settlement?
Any kind of on-the-job injury or illness is meant to be covered by workers’ compensation benefits. Such payouts are less of wages subsidy and related to the loss of claimants’ physical abilities. But any lump sum payouts of this kind targeting permanent impairments are mostly non-taxable as well. This scenario might change for weekly receivable WorkCover benefits, though, which can be taxable in general. Weekly workers’ compensation payouts are not considered as alternate wages but might still get classed under gross taxable income.
At the end of this discussion, it might sound wise to ensure that the majority of your winnings from a personal injury lawsuit are non-taxable. Under certain circumstances, a part of your lawsuit winnings might relate directly to a personal injury while the rest may not. Consequently, it might become imperative to state explicitly such bifurcations within the settlement agreement itself.
This is particularly important when your injury-related winnings exceed non-injury-related reimbursements by a larger margin. However, doing so does not eliminate chances of verifications for non-taxability of settlement by the IRS on their part. But clear information about the allocation of settlements in such matters might give you a better chance of saving a major chunk of the winnings from taxation.
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