Two things are certain in life – death and taxes. Luckily, if you’ve received money from a personal injury claim, taxes are not a certainty. So, are personal injury settlements taxable?
“Are personal injury settlements taxable?”
As you gather your W-2’s and 1099’s during tax season, you might have some questions about your personal injury settlement. Unfortunately, the answer isn’t perfectly straightforward. The IRS isn’t out to make our lives any easier. The good news is: we are here to help you understand the ins and outs of the taxes applied to your personal injury claim.
Here’s the low-down on personal injury claims and taxes.
Generally, a settlement received from a personal injury claim is not taxable. Whether your claim was settled, or the court awarded you money after trial, your compensation for bodily injuries is treated the same way. Therefore, you did not have to claim it as part of your income and you will not be taxed on the settlement.
So what is taxable in a personal injury case?
The tax code is complex and not exactly Oprah’s Book of the Month page-turner. To help guide you through the tax code when it comes to personal injury cases, the three main exceptions to the general rule that settlements are tax-free are highlighted below.
1 – Deductions for Medical expenses
Nobody likes the guy at the party who double-dips his chip into the guacamole. The IRS really doesn’t like double-dipping either. The IRS allows people to deduct out-of-pocket medical expenses from their taxes. However, if you use the out of pocket medical expenses as a tax deduction in one year, you must report compensation for those expenses in the following years. The IRS doesn’t want you to use your medical expenses as a tax deduction and then double up and get tax-free compensation for those exact same expenses.
2 – Interest
Any interest earned on your personal injury settlement is taxable. This applies when your claim is taken to court and you are awarded money. The judge will most likely determine the amount of interest to be applied in your case. Pre-judgement or post-judgement interest on an award is taxable.
3 – Punitive Damages
You may or may not have received punitive damages in your settlement. Punitive damages are a way a court can punish the defendant in hopes of preventing the defendant from doing something bad again. Your settlement is a way to financially compensate you for the pain you feel. That’s why the IRS doesn’t want to tax that. But since punitive damages aren’t meant to compensate you for your injury they are taxable.
It’s Good to Always Double-Check With an Accountant or Attorney
If you have questions about your personal injury claim always, reach out to your attorneys or accountants.