Solving Tax Problems for a Personal Injury Award
If you have been involved in a major accident resulting in personal injury, then you may think that the money you receive as part of a personal injury award is tax-free. Be careful not to make that assumption. It is likely that a personal injury award may be taxed in some way.
In this article, we will discuss the various tax ramifications of receiving a personal injury settlement or jury award. In particular, we will focus on the most recent changes to the U.S. tax law in 2018, which have only further complicated the way a personal injury award is taxed.
It is important you know this information, and that your attorney shares this information with you, at the beginning of a personal injury lawsuit. That is because the tax treatment of any award will shape how you view the value of your case, how you view possible settlement proposals, and how you determine whether to appeal a jury award after trial.
After reading this blog, you may have additional questions about the tax implications of a personal injury award in your own life. If that is the case, we welcome you to contact The Law Office of Mary King, P.L. We are tax reform attorneys in Florida, and we provide services in all areas from tax debt settlement to planning the most efficient tax strategy for individuals and businesses. Call today at 941-906-7585, or fill out our contact form.
The Different Types of Personal Injury Awards
The first thing to keep in mind when considering a personal injury lawsuit is that there are two primary kinds of personal injury awards.
Compensatory damages, as the name suggests, are meant to compensate you for the costs associated with your injury. Indeed, the overarching goal of a personal injury lawsuit is to bring the victim back to the condition he or she was in prior to the accident, or as close as possible. Thus, compensatory damages include an award for medical treatment for physical injuries, loss of earnings and earning capacity, and pain and suffering, to name a few.
In contrast to compensatory damages, punitive damages are meant to punish the negligent party for causing the victim harm. For example, if a company knowingly created a product that would harm people, then the victim will receive punitive damages to penalize the company for its conduct.
How Were Damages Taxed Prior to 2018?
Prior to the 2018 tax law, the basic rule was that compensatory damages were tax-free, and punitive damages were subject to tax.
So, for example, if you were injured in a car accident, and the jury awarded you a $1 million verdict. $500,000 of the verdict was for compensatory damages, and $500,000 was for punitive damages. Prior to 2018, you would pay no taxes on $500,000, and would only have to pay taxes on the $500,000 punitive award.
Now, let add the issue of attorney fees. Let us assume that your attorney was working on a contingency basis and was to collect 30% of whatever award you received. Thus, if you won that same $1 million award, you would have paid $300,000 to your attorney, leaving you with $700,000.
Prior to 2018, the plaintiff with that contingency fee arrangement would have been able to take a tax deduction on the $300,000 paid in attorneys’ fees.
The Changes From the 2018 Tax Law
The tax law passed by Congress in 2018 has made two substantial changes to the above scenario.
First, compensatory damages are no longer entirely tax-free. The new law only makes compensation for physical injury tax-free. That means that if part of your compensatory award was for pain and suffering, or mental anguish, then you must pay tax on those parts of the compensatory damages award.
What makes this more confusing is that there are some injuries that have both physical and mental aspects – such as a traumatic brain injury that manifests as a mental issue, but also involves physical damage to the brain.
In sum, the taxability of compensatory damages has become unclear. It is important, therefore, to consult with a tax attorney to understand how the new law impacts your personal situation.
Second, attorneys’ fees are no longer tax-deductible. In the example above, the plaintiff received a $1 million verdict, $300,000 of which was paid to the attorney. With a tax deduction for those fees, the plaintiff would only be paying taxes on the punitive damages portion of $700,000 (the verdict minus the attorneys’ fees).
With the new tax law, however, you can no longer deduct attorneys’ fees. That means that if you were the plaintiff who received the $1 million verdicts, then you would have to pay taxes on the punitive damages portion of the full $1 million. In other words, you will be treated, for tax purposes, as if you received 100% of the money awarded, even though you paid 30% of it to your attorney.
To conclude, the new tax law has complicated the taxation of personal injury awards considerably. It is all the more important that you consult an experienced tax reform attorney in Florida to help you understand what to taxes to expect with a personal injury award.
Get the Help of Qualified Tax Reform Attorneys in Florida
Struggling with the tax implications of a personal injury award can be challenging. That is why you need the help of a seasoned tax reform attorney in Florida, so you can get sound advice and benefit from the experience and resources of an attorney who has confronted the IRS in many cases, on many occasions.
Indeed, the U.S. tax code is complex and is not something easily navigated by a person who does not have legal training.
Mary E King
The Law Office of Mary King P.L., an experienced tax reform attorney in Florida, offers complete services in all areas from tax implications of alimony to planning the most efficient tax strategy for individuals and businesses. Call our IRS problem-solving services firm in Florida today to schedule an initial consultation. With years of experience, the Law Office of Mary E. King can make sure that your tax issues are resolved in your favor. Fill out our online contact form, or call us at 941-906-7585.