Paying Taxes on Personal Injury Awards
When someone causes an accident that leads to physical injuries, he or she should be held accountable for any resulting damages. A knowledgeable personal injury attorney will consider all avenues of loss when seeking damages for a client.
At Chanfrau & Chanfrau, we have helped many clients receive maximum compensation for accident damages. One thing that frequently concerns our Daytona Beach, FL, and Palm Coast, FL, clients is how much tax they will owe on their settlement. Here, our attorneys discuss personal injury awards and taxes so that injury victims can better prepare for how much they may take home from a personal injury settlement.
Non-Taxable Personal Injury Damages
The majority of personal injury damages are not taxable, on either the state or federal level. The IRS excludes any awards that a person receives from a physical injury or illness when it is considering income. This rule applies whether a person settles an injury claim before going to trial, or whether the case goes to court and the money is rewarded through a verdict.
Nearly all sources of compensation are considered non-taxable in a personal injury case that involves a physical injury, including:
- Medical expenses
- Lost wages
- Physical and emotional suffering
- Loss of consortium (in the case of a wrongful death)
- Attorney fees
Our Daytona Beach and Palm Coast clients should understand that the key factor here is the physical injury. Personal injury compensation is only non-taxable when losses stem from a physical injury or illness. If a person is seeking compensation for damages stemming from emotional distress, those awards will be taxable, unless it can be shown that the victim also suffered some type of physical injury.
Taxable Damages
While most personal injury damages are non-taxable provided they are related to a physical injury, there are some exceptions. If the settlement includes any punitive damages, those will be taxable. Punitive damages are additional financial compensation that may be rewarded as a type of punishment for the defendant. Punitive damages are not directly related to physical injuries; they are just meant to deter the defendant from committing the same type of reckless negligence in the future.
Another potential source of personal injury compensation that is taxable is interest. Since personal injury cases usually take a long time to settle, the court may award interest on any damages that are received. The court typically calculates interest from the day the suit was filed until the day that payment is received. Like punitive damages, interest is not directly related to physical injuries, so it is taxable.
Protecting Your Money
Most damages that are awarded in a personal injury case are not taxable, but many settlements include a portion of financial reward (such as interest or punitive damages) that is taxable. To protect non-taxable damages and make it easier to distinguish between the two come tax time, it is a good idea to have damages clearly separated in a settlement. Our attorneys can ask that any settlement agreement clearly states which portion of awards relates to personal injury, and which does not.
Contact Our Practice
If you have suffered a personal injury caused by the reckless or negligent actions of another person or party, the attorneys at Chanfrau & Chanfrau would be happy to help you collect the compensation you are due. Our Daytona Beach and Palm Coast clients can call our practice at (386) 258-7313, or send us a message online.