Taxes on Personal Injury Awards
If you’ve been awarded money as a result of a lawsuit or legal settlement, a Riverside personal injury attorney can advise you about the related tax issues. Whether you must pay taxes depends on your case and why you received payment.
Personal Injury Lawsuits
If you receive money to compensate you for a personal physical injury or sickness, that money is not considered income. The money you receive is not taxable, whether you receive the money as a lump sum or in installments. However, if you receive money for punitive damages, for example if the defendant intentionally or recklessly injured you, that money is considered taxable.
Non-Personal Injury Lawsuits
If you receive an award in a non-personal injury lawsuit, such as an employment dispute, the money is considered income and is taxable. The following items count as ordinary income and are taxable:
- Payments for lost wages or lost profits
- Interest on an award
- Punitive damages
- Amounts received in settlement of pension rights
- Damages for intellectual property infringement
- Damages for breach of contract
- Damages for interference with business relationships
- Damages for libel or slander
- Back pay and damages for emotional distress for claims in an employment discrimination or wrongful termination case
- Attorney’s fees and costs (including contingent fees) where the underlying recovery is included in gross income. However, note that you may be able to deduct this as a business expense.
Damages for Emotional Distress
If you receive an award for emotional distress arising from a personal injury, the award is considered part of the personal injury and is generally not taxable. Examples of emotional distress include headaches, insomnia, and stomach disorders.
Damages for emotional distress are considered taxable income if the emotional distress did not arise from physical injury or sickness, but arose from something like employment discrimination. However, the taxable portion of the damages may be reduced by the amount of medical expenses paid to treat the emotional distress.
If you have suffered a personal injury, call the Law Offices of Samer Habbas & Associates Inc. P.C. at (888) 848-5084 for assistance with your injury claim.