Recent data shows that in the US, around 95% of lawsuits are resolved out of court. The ratio jumps to 98%. This means that only around 1 out of every 50 cases will end up in court. Hence, the most common method of obtaining compensation in a personal injury lawsuit these days is settlement. You might be questioning if you are obligated to pay taxes on the sum of money when you receive your settlement check. The good news is that a personal injury settlement is usually tax-free. Contact a personal injury lawyer to learn more about how injury settlements can be made tax-free.
Do You Have To Pay Taxes For The Settlements You Recieve In A Personal Injury?
Money obtained from a lawsuit for income lost is taxed as income. Punitive damages are specifically provided for in Article 104 of the tax code to be subject to taxes because they are not deducted from gross income. Punitive damages are not typical awards; instead, they are awarded by a jury in order to punish a defendant for severe offenses and to discourage the defendant and others from carrying out similar misconduct.
If you have previously excluded the cost of medical treatment in a previous tax year, you may be subject to taxes on compensation for medical expenditures depending on when your lawsuit settlement or judgment is made.
When Are Settlements for Personal Injuries Tax-Free?
Due to the fact that a personal injury settlement is not recognized as earned income, it is often exempt from tax when it reimburses a person for both physical injuries and other losses. Suppose that the settlement includes covers the plaintiff’s out-of-pocket expenses for medical treatment of their injury. There would be no taxes on this portion of the settlement as well. Let us analyze this. What does tax-free indicate?
- compensation for medical expenses related to injuries or illnesses
- Compensation for suffering and deformity (also known as non-economic damages)
- reimbursement for mental anguish brought on by a disease or physical harm
- compensation for medical costs
When Do Personal Injury Settlements Get Taxed?
Consider that a personal injury case is tried and the plaintiff wins the case due to the decision of the jury. The plaintiff receives compensation from the jury for their physical harm. Furthermore, they provide the plaintiff punitive damages.
The amount of money granted in punitive damages frequently becomes taxable. Punitive damages are meant to hold the defendant responsible for their planned, reckless, or nefarious acts—like selling an unsafe item or operating a car while drunk.
