No one wants to be in the position where they have to file a personal injury claim, but the positive thing that can come out of the process is your settlement. The settlement can be just what you need to start recovering and moving on from whatever accident or injury happened to you.
Getting your personal injury settlement can be a relief but is a personal injury settlement taxable? The answer is more complicated than just yes or no. We reviewed the website of Cook, Barkett, Ponder & Wolz and found the best thing you can do if you’re dealing with a personal injury settlement is to talk to attorneys so they can protect as much of your settlement as possible.
Your Personal Injury Settlement Isn’t Taxable if It’s for Physical Injuries
Generally speaking, personal injury settlements are exempt from being taxable by the Internal Revenue Service (IRS). By law, you aren’t required to report your personal injury settlement amount on your taxes.
You don’t need to report whether you receive one lump sum payment for your settlement or continuing payments over time. Some people choose to report it, so there are no discrepancies, but you don’t have to since the IRS can’t tax you for that income.
What physical injuries are is evident. Whether you’re receiving long-term care for your injuries or not, if you receive compensation for bodily injuries, the IRS cannot tax you for it. This includes the cost of your immediate care, necessary physical therapy, and any medications you need for said injuries and care.
The IRS Can Tax Your Settlement for Non-Physical Injuries
In some cases, the IRS might try to tax you for any compensation you receive for non-physical injuries. Technically, they still can’t tax you for pain and suffering or other emotional damages, but there are instances where they attempt to get away with it.
According to the IRS, emotional damages aren’t exempt from what you report on your taxes as your gross income. You’ll have to include whatever compensation you receive in a settlement for your emotional damages or pain and suffering.
Previously, the IRS wasn’t allowed to tax any portion of your personal settlement injury, but the IRS made a change within the last few decades that will enable them to now.
How To Protect Yourself
When it comes to getting your injury settlement, most people get compensation for their physical and emotional injuries. The issue is that when you receive payment from the claim, it isn’t broken down line by line about what amount is for what type of damage.
Working with professionals is the best way to handle tax season when dealing with a personal injury settlement. You’ll want to hire a personal injury attorney knowledgeable about all the rules and regulations surrounding your compensation.
In addition, you’ll want to make sure you work with someone who knows how to file taxes well. Even if you’re used to filing your own taxes, hiring a professional to help you with a personal settlement claim can help protect you from putting in the wrong information and getting taxed.
Dealing with everything surrounding a personal injury claim is scary, frustrating, and time-consuming. The one good thing to come out of it will be your personal injury settlement. Thanks to the accident, your personal injury settlement can help with medical bills, lost wages, and emotional damages you had to deal with.
When it comes to reporting your personal injury settlement amount on your taxes, physical damages from the injury are exempt from being taxable in your gross income. Technically they can tax you for emotional damages, which can get tricky.
The best thing you can do is hire a personal injury attorney and tax specialist to ensure you aren’t getting taxed when you shouldn’t and that you don’t lose out on any portion of your compensation.