You were involved in an accident caused by the negligence or recklessness of another party. If you’re collecting a settlement or judgment, you may wonder if it is taxable income. The answer is, “it depends.” Personal injury settlements can be taxable, nontaxable, or partially taxable depending on various factors, such as how you were damaged, how the case was resolved, and even how checks and IRS Form 1099 were issued.
The Internal Revenue Service (IRS) has set broad guidelines to deal with the taxability of personal injury settlement. Below are some important factors accident claimants should be aware of regarding the taxability of their settlements or verdicts.
Under current law, settlements or verdicts for physical or emotional injuries are generally non-taxable. For instance, if you were involved in a car accident and incurred $25,000 in medical expenses and got reimbursed $25,000 in a settlement it would be tax-free and not need to be reported on your tax return.
However, like most legal issues there are exceptions. For example, if you deducted the $25,000 in medical expenses in a previous tax return, the settlement would be taxable.
It should be further added that an accident claim settlement with a monetary award based partially on emotional distress or mental anguish may also be tax-free.
Certain types and portions of settlements or jury verdicts in personal injury claims may be subject to taxation, such as the following:
- Interest: Personal injury settlements that are attributed to interest are generally taxable.
- Certain types of emotional distress or mental anguish compensation: If no correlation can be established between the emotional distress/mental anguish and a physical injury, the settlement is subject to tax.
- Punitive damages: Punitive damages, which go beyond ordinary compensation for injuries, is intended to punish the wrongdoer, which is generally taxable.
- Loss of income or potential earning capacity: A settlement or jury award for compensation for loss of income or earning capacity is taxable and must be reported on your tax return.
If you or a loved one has been injured in an accident caused by the negligence of another party, you should discuss your legal options with an experienced accident attorney as you may be entitled to compensation. The skillful attorneys at the Law Offices of Samer Habbas & Associates specialize in all types of personal injury accidents and have successfully attained service and results that go beyond expectations. For more information or to schedule a complimentary consultation with one of the attorneys, please call 949-727-9300.