You probably spent so much time battling back from injury and fighting for compensation last year that you can't imagine having to pay some of your personal injury settlement out in taxes. And, for the most part, you won't need to. But there may be some portions of the settlement or award that may be taxable income, and you may owe some percentage to the IRS.
So here's what you need to know about how a personal injury settlement will affect your taxes.
Physical Injury and Sickness Compensation
Settlement amounts allocated for personal physical injuries or physical sickness should not be included as income, and therefore the full amount is non-taxable. However, if any of that amount was for medical expenses that you paid and deducted from your taxes in prior years, you must report that amount if the deduction amounted to a tax benefit.
Emotional Distress Compensation
So long as the emotional distress is related to the physical injury or sickness for which you were compensated, that amount will also be untaxed. But if you receive proceeds for emotional distress or mental anguish that did not originate from a personal physical injury or physical sickness, you must include that as income. The amount you'll be taxed, though, can be reduced by any amount you paid for medical expenses.
Lost Wages Compensation
If you missed work due to an injury, compensation for those lost wages may not be taxable. But if you got money in a settlement in an employment-related lawsuit, like a discrimination or wrongful termination claim, proceeds for lost wages can be taxable just like any other income.
Punitive damages are designed to punish bad behavior, rather than compensate for an injury. Therefore, if you asked for and received punitive damages as part of your personal injury settlement or award, that amount will be considered taxable income.
For a more complete picture of how your personal injury settlement will affect your tax filing, contact an experienced injury attorney near you.