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How Does A Settlement Factor Into Tax Time?

The reason you start up a personal injury case is because you, your property, or both have been physically or emotionally damaged, and as such you deserve to be compensated for things like medical bills, lost income, repairs and replacements, pain and suffering, and so on. But since a settlement is a kind of income of its own, it’s worth asking whether it’s taxable or not and to what extent. Fortunately, at least when it comes to personal injury settlements, the news is mostly good.

Compensation Isn’t Taxable

That’s right. The money you receive as part of a settlement made before or after filing a case, along with the money you receive from a jury’s award, is all tax-free when it involves a physical injury to yourself or your property. The IRS has held to this policy for decades, and generally speaking the states have followed suit. Since this kind of settlement is meant to replace what you’ve unfairly lost, it isn’t considered a real form of income.

On the other hand, other kinds of settlements are taxable. Punitive damages, for instance, aren’t meant to pay off the victim so much as they force the at-fault party to pay extra, much like with a government fine. Because of this, the government considers punitive damages to be a windfall and taxes them accordingly. The government is also less generous regarding purely emotional damages: while pain and suffering are tax-free so long as they’re attached to a physical injury, when it’s a purely emotional experience, it’s purely taxable.

The Future Income Question

One type of compensation which can come up is future income: if you or a loved one have sustained an injury which permanently leaves you with limited mobility or a limited ability to think or interact with others. If this sort of thing should happen, you can add lost future income to your list of damages.

However, considering that these damages are tax-free but the income they represent isn’t, the question becomes whether to calculate this income based on pre-tax gross or post-tax net.

Florida courts have some interesting case precedents on this front, along with the example of the PIP statute. The no-fault PIP benefits pay out 80 percent of medical bills up to the policy limit, but they only pay 60 percent of missing income. While this may seem arbitrarily low, the reason for this is because PIP benefits are as tax-free as a personal injury settlement, and so the 20 percent difference approximates the amount of money you would have paid on your income in taxes.

Because of this statute and other case precedents, it’s usually held that future income calculations should be based on gross income and not net, and whether or not the jury should receive instructions regarding income tax is up to the specific case. Wrongful death cases are an exception, however, since Florida laws on the topic clearly refer to net income for calculating certain damages.

If you’d like more advice on taxes and tax season, consult a CPA or a tax lawyer. If you’d like to know more about Florida personal injury law, however, then you should consult the offices of , Goldman, Babboni, and Walsh. You can find our offices throughout southwest Florida, and between all our lawyers we have a combined 150 years of experience working with Florida law. You can contact us anytime online for a free case review, and if we accept your case we’ll do everything in our power to get you the compensation that’s rightfully yours.

Michael J. Babboni's wide-ranging legal career is based on the strong belief that everyone should be treated fairly and have access to effective legal help. Michael began putting his beliefs in action by helping the people of St. Petersburg Florida get what they are owed in civil trials fighting to protect families by making corporations pay, and honor their obligations.

How Does A Settlement Factor Into Tax Time?

Goldman Babboni Fernandez
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