Most personal injury cases are typically settled before trial or during the trial. When you and your lawyer agree to a settlement amount from the at-fault party’s insurance company, your lawyer will then inform the defense attorney. However, it is important to note that your settlement might be taxable. This is especially true for any awards given in place of lost wages as wages are generally subject to taxes. However, because every case is unique, you may be best served to consult a tax attorney to confirm your tax obligations. Below are some of the issues which typically apply to personal injury settlements.
1. Compensation for physical injuries should not be taxed:
State and federal laws do not allow the taxation of settlement awards that are paid for physical injuries. The types of injury settlements that are usually exempted from taxes include payments for the following:
- Medical bills
- Emotional distress
- Loss of consortium
- Pain and suffering
Similarly, when attorneys fees come from a physical injury settlement, they are not usually taxed. There are exceptions to this rule. For instance, if you suffer an injury or a sickness as a result of a breach of contract, and you have based your lawsuit on the breach, you may be taxed.
2. Punitive damages:
Punitive damages are always taxable. If you have a claim which includes punitive damages as part of your compensation demands, and you have based your lawsuit on breach of contract, the settlement amount will be taxable. In such a case, ask your lawyer if it would be beneficial to you from a tax standpoint to separate your case into compensatory damages and punitive damages. The specification may ensure that you have only been taxed for punitive damages and not all of your compensation.
3. Cases where the payment has accrued interest:
Imagine a case whereby you filed a compensation claim in January 2015, went to court and won the case. Then, the defendant decides to appeal, and the case dragged on for a few years during which they did not pay you any compensation. If the court upholds the first verdict, you will be paid for the damages and an additional interest accrued in the 24 months that the case was pending. This additional interest is taxable.
4. If your claim is for emotional damages only:
Cases of psychological damage have become quite common. In case you have contested and won a case for employment discrimination, emotional distress, or any other claim that does not include an actual physical injury, the compensation amount you receive will likely be taxable. However, if you can prove that there was even a slight form of physical harm, the compensation may not be taxed.
How to Minimize Your Tax Risk
The first step is hiring a competent lawyer, like an experienced and trusted Milwaukee personal injury lawyer. The lawyer will know how to file your claim such that it will have a settlement for the injury claim and another for the non-physical injury claim. This will help in cases where you have an injury and a non-physical injury claim, and the injury settlement is larger.
Take the time to choose the most experienced lawyer possible who can increase your chances of winning an injury claim, and also offer legal advice as to how to exempt your compensation from taxation.
Thanks to our friends and contributors from Hickey & Turim S.C.. for their insight into personal injury practice.