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Do You Pay Taxes On Your Personal Injury Settlement?

Do You Pay Taxes On Your Personal Injury Settlement?So you’ve won your settlement claim and are now receiving a large compensation packet. However, you may be worried about how receiving a large chunk of money will impact your taxes. Are personal injury settlements considered taxable income? Will your injury end up cost even more money come April? The short answer, is fortunately no, but personal injury settlement taxation is a little more complicated. Here is our guide to how your settlement might be taxed.

Are Personal Injury Settlements Taxable?

Fortunately, in the State of Florida, most personal injury settlements are not taxable by state law. Personal injury settlements are also not typically taxed by the federal government either. Federal tax law excludes damages received from personal injury on gross income. This is because personal injury damages are designed to pay for things like medical bills, pain and suffering, and attorney fees. Thus, personal injury settlements are a liability and not an asset. So if you get a settlement on your claim, in general you will not be hit by a large tax bill at the end of the year.

Exceptions To The Rule

In general personal injury settlements are not taxed, however there are some damages you receive along with your injury claim that may be taxable including:

  • Punitive Damages: Punitive damages are considered a form of income because they go beyond the cost of the initial loss. So they will be taxed by the IRS.
  • Interest: Interest is also a form of income that is above the cost of the initial loss, so it will be considered taxable income by the IRS.
  • Lost Wages: Since your wages are part of your income, the amount you receive for lost wages count as the wages you’d normally be earning. Therefore, the IRS sees lost wages as a form of taxable income.
  • Emotional Distress/Mental Anguish: For the most part emotional distress and mental anguish are not considered taxable income if they are a direct result of the injury. However, if the award for emotional distress and mental anguish is not related to the injury, then it is considered income.
  • Invasion Of Privacy: Invasion of privacy is a form punitive damage and not directly related to the costs incurred from the injury, so it will be taxed.
  • Discrimination: Discrimination usually results in lost wages, so it is considered a form of compensatory income and thus, taxable.
  • Harassment: Harassment can cause emotional distress or injury, so sometimes it may not be taxable. It depends on the circumstances involving the harassment. Generally the IRS will tax harassment in relation to the injury.
  • Wrongful Termination: Wrongful termination is considered a form of lost wages, so it is considered a taxable income.
  • Defamation: Defamation is also not directly related to the injury and is to make up for any lost income, so it is also considered taxable income.

Protecting Your Settlement Against Taxation

If you have made multiple claims against the defendant, you need to make sure you clearly outline what award is received for which damages. So rather than lumping it all into one figure to cover all damages, you need to delineate personal injury, attorney fees, and then taxable damages from one another. That way when tax time comes, you can prove to the IRS that only a portion of your settlement, if any, is taxable.

Get Legal Advice

Protecting your settlement from unnecessary taxation is just one of the many reasons it is important to have solid legal advice from a licensed personal injury attorney. Not only will our attorneys at Goldman, Babboni, & Walsh help you get a fair settlement, they can help make sure the terms of the settlement are clear so you can provide the IRS the proper documentation so your personal injury settlement isn’t unfairly taxed. So before entering negotiations, make sure your future settlement is protected with our help.

During his time as a public attorney for the State of Florida, Bernard Walsh developed a passion for defending the legal rights of Florida's citizens. Having seen many people being taken advantage of after being injured and the financial harm that can cause for families he committed himself fully to helping injured clients get justice, by fighting to make greedy insurance companies pay what they owe.

Do You Pay Taxes On Your Personal Injury Settlement?

Goldman Babboni Fernandez
Murphy & Walsh

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