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Are Personal Injury Settlements Taxable?

You were seriously injured in an accident that was caused by the negligent actions of another party. You hired an experienced Los Angeles accident attorney who was able to get you the compensation you deserved for your injuries. But what happens to your settlement? Do you have to pay taxes?

The simple answer is no. You don’t have to pay taxes on your personal injury settlement – depending on the specific facts of your case. It is best to let your attorney handle your claim so that he increase the likelihood that you don’t have to pay taxes.

Non-Taxable Personal Injury Proceeds
Personal Injury Settlements

The IRS has made it clear that if you receive a settlement for personal physical injuries or physical sickness and you did not take an itemized deduction for medical expenses related to your injury or sickness in previous years, the full amount is non-taxable. You will also have to make sure not to include the settlement proceeds in your income.

Along the same lines, any settlement proceeds that you receive for emotional distress or mental anguish resulting from your personal physical injury or physical sickness are also non-taxable.

Taxable Personal Injury Proceeds

However, not all personal injury proceeds are non-taxable. Four main types of proceeds that may be subject to taxation include:

  • Lost wages or lost profits: If you receive a settlement in an employment-related lawsuit (such as unlawful discrimination or sexual harassment at work) or loss of income as part of an accident claim, it will be subject to taxes. The basic rule is that any proceeds that are subject to employment tax withholding’s (such as wages, salaries, tips, etc.), may be subject to tax as part of a personal injury settlement.
  • Loss-in-value of property: If a property settlement that is part of a personal injury claim exceeds the adjusted basis in the property, the excess is considered income and may be subject to taxation.
  • Interest: Interest on any settlement is generally taxable as “Interest Income.”
  • Punitive damages: If you are awarded punitive damages as part of your personal injury claim, that portion may be taxable.

Depending on the specific facts of your situation, your Los Angeles personal injury attorney may be able to allocate your settlement in a certain way to give you the best chance of having most of the settlement excluded from taxation.

Consult an Experienced Attorney

Tax laws often change, especially with regard to the tax implications of injury settlements. If you have filed or are planning to file a personal injury lawsuit and are concerned about the tax implications of the settlement or judgment, you should immediately consult an experienced accident attorney.

Call Us

The legal team at the Law Offices of Samer Habbas is dedicated to helping our injured accident victims and their loved ones reach the best monetary settlement when they are involved in any type of accidents.

For more information or to schedule a free consultation with one of our Los Angeles accident attorneys, please call the Law Offices of Samer Habbas at (888) 848-5048.

https://www.irs.gov/pub/irs-pdf/p4345.pdf

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