Will My Personal Injury Claim Be Taxed by the IRS?

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Will My Personal Injury Claim Be Taxed by the IRS?

As any victim can tell you, undergoing personal injury is an incredibly stressful experience. It can be taxing on your body, your mind, your finances, and your time all at once. Due to somebody else’s negligence, you may find yourself having to sink in an incredible amount of time and energy in order to restore your quality of life back to where it was before the accident occurred. This process may cause you significant emotional distress, loss of enjoyment of life, lost wages due to lost time, exorbitant medical bills, possibly lifelong disabilities, and more. If you find yourself suffering any losses after an accident that causes you personal injury, you may be entitled to seek out legal help and collect any damages and compensation you are owed. However, it can be difficult to figure out the practicalities of collecting all this compensation on your own. There are many things to take into consideration, such as, “Will my personal injury claim be taxed by the IRS? And if so, to what extent? What makes them taxable?” This blog post may be able to help you answer these questions and possibly more.

Your Personal Injury Claim May Be Taxed by the IRS If…

Depending on the case, a personal injury settlement can be taxable, nontaxable, or even partially taxable. Most personal injury settlements are not taxable—at least not if the money has been paid to you after you have suffered a physical injury or sickness. You may also not be taxed on any compensation you receive in order to help you deal with emotional distress or lost wages caused by your physical injury.

In other words, physical injuries and physical sickness will generally be considered nontaxable. Your personal injury settlement will also not be taxed if you do not file a deduction on your taxes for any relevant medical bills. However, some exceptions may apply. In most cases, you will find that this is true when your personal injury settlement acts as a replacement for your income. The two most common examples of this are income replacement and medical deduction replacement.

Will My Personal Injury Claim Be Taxed by the IRS?Income replacement is pretty much exactly what you would expect it to be. It refers to the phenomenon in which a personal injury victim receives a settlement in order to replace any income they may have lost. For example, you may have lost income as a result of having to make frequent medical visits after your accident. Or your accident may have caused you a lifelong injury which prevents you from seeking out further work. In such cases, you can expect to be taxed by the IRS on your personal injury settlement. Working with a good attorney can help you determine whether or not this is the case—and to what extent. An experienced lawyer may also be able to help you maximize any compensation you receive.

Medical deduction replacement, on the other hand, refers to the phenomenon in which you itemize your tax return for any medical expenses you have incurred as a result of the accident. If you are then reimbursed for these medical bills in your settlement, you can expect to be taxed by the IRS. In such cases, you will be required to report any settlement money you receive for the express purpose of reimbursing medical expenses as “Other Income” on line 21 of Form 1040.

In addition to this, many people mistakenly believe that compensatory income will automatically be nontaxable. However, this is not a 100% accurate view, as it is more of a legal gray area. A seasoned attorney may be able to help you determine whether or not it is true to your specific case.

Other Taxable Settlement Amounts

However, you may find that there are other taxable settlement amounts when it comes to your personal injury claim. For instance, any interest accrued during a personal injury settlement is generally taxable. Furthermore, per the IRS, any compensation accrued for emotional distress and mental anguish as a result of the accident may be nontaxable. Exceptions apply if the emotional distress and mental anguish are not directly caused by the accident itself. In these cases, there is no physical altercation that causes emotional distress and mental anguish. It is possible for personal injury settlements to be tax-free if they involve monetary compensation on the partial basis of emotional distress or mental anguish—particularly if they lead to physical injuries and medical expenses as a result.

Other nonphysical injuries may be considered taxable if they are not directly correlated to the accident in question. Examples may include invasion of privacy, discrimination, harassment, and wrongful termination. In addition to this, it is possible that you receive a special type of compensation known as punitive damages. The courts may decide that you are owed punitive damages if you have suffered as a result of behavior that is considered to be especially egregious and/or harmful. Such damages are meant to punish the wrongdoer and are awarded on top of any ordinary, existing compensation you are already due. In most cases, punitive damages are subject to taxation by the IRS. Although some exceptions may apply, it will usually not matter whether or not there were physical injuries or sickness as a result of the accident.

Seeking Legal Help

It is important to be mindful of all the specifics of your personal injury settlement. You want to ensure that you are getting the amount you deserve, and you also want to ensure that you know exactly what you are expecting. You may want to make sure you have paid any liens or other outstanding debts after you have received your settlement. A good personal injury attorney may be able to help you figure out the best possible path to take for your specific situation. At Injury Victim Law, we can help. Although we are a Colorado-based firm, our team of investigators and experts is here to help victims all across the country. Contact us today to schedule an initial consultation with one of our nationwide personal injury lawyers.

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