Taxation of Personal Injury Claims
In most cases, money received from a personal injury claim is not taxable. This rule applies to federal and state law, and it does not matter if the case was settled or if the money is the result of winning a lawsuit. Any money received from this type of situation is not counted as a taxpayer's gross income, whether it is used for medical expenses, as a source for lost income, pain and suffering, or paying legal fees. Whether the claim is a result of being hurt or illness, the IRS will not typically have a right to tax any money received.
Possible Exceptions
While money from a claim is not taxable, claimants will be taxed on any damages that are a result of a breach of contract that causes the infliction of pain. In addition, it is important to remember that only compensatory awards are non-taxable. Punitive awards are not. A personal injury attorney will request that the judge separate compensatory settlements from punitive damages so that the IRS will be able to easily discern what they can tax.
If there is any interest accrued on a judgment, that interest amount is also taxable. In many states, the court will add the interest to the verdict for the amount of time the case has been waiting. For instance, if a claimant receives a judgment, but the defendant appeals and the case is not settled until one year later, interest will accrue on the award for that year. The IRS will tax this interest.
Questions About Emotional Injury
One common misconception is that settlements for emotional injury are also taxed. This is not the case. Any claims for emotional distress will be subject to taxation unless any evidence of physical pain can be proven.
When There Are Two Claims
In some cases, a claimant may have two judgments against a defendant. In this case, a personal injury attorney will have to ensure that the judge separates the award properly. In the settlement, it is crucial to ensure that it is stated very clearly which part of the settlement relates to physical bodily damage and which does not. This could include money meant for other forms of distress or property damage.
When someone wins a settlement, it is important to remember that while it is generally non-taxable, the IRS can always challenge a claim. If this occurs, it is important to work closely with a personal injury attorney and a tax accountant to ensure everything is handled properly.
When searching for a personal injury attorney, Hillsboro, Oregon residents visit Corbridge Law Offices, P.C. Learn more at http://www.corbridgelaw.com/personal-injury/.
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