Filing Taxes After a Personal Injury Settlement: What You Should Know

There’s a certain time of year that seems to get under people’s skin. In addition to the hectic holiday season and the sweltering summer, there’s a particular period of time that has the potential to make you more stressed and anxious than ever—yes, we’re talking about tax season.

At the J. Gonzalez Law Firm, we too suffer from tax season dread. Whether you have numerous 1099 forms or several rental properties, gathering all your paperwork and attempting to navigate your way through your taxes can be an extremely trying and frustrating time. While broad tax-related matters aren’t necessarily our specialty, when it comes to filing personal injury settlements, we have the inside scoop.

We are the perfect source to rely on to get some of your most hard-hitting questions about personal injury settlements answered.

After navigating through the trials and tribulations of filing a personal injury lawsuit, working with your lawyer, and eventually receiving your settlement, there’s no doubt that all you’ll want is for your life to go back to normal. The team behind the J. Gonzalez Law Firm understands this more than anyone. This tax season, skip the worry and dread and read on for five things you should know about filing with a personal injury settlement.

Personal injury compensation is not taxable.

This is one of the most important facts to understand before you begin to stress over your taxes or seek the aid of a tax professional: the proceeds received from most personal injury cases are not taxable under federal or state law.

It does not matter when or whether the case was filed in a court of law. Essentially, the proceeds generated from personal injury settlements are tax-free. This means that neither the IRS nor the federal and state government can tax you on any funds you received as a result of injuries or health complications you suffered. The reason for this is that in the eyes of the law, the compensation you receive in a settled personal injury case is meant to replace the following: lost wages, medical bills, emotional stress, pain and suffering, and loss of consortium.

Loopholes

Of course, despite the previous point, it’s important to know that when it comes to filing your personal injury settlement, there are exceptions to the general rule.

First, let’s look at punitive damages:
The easiest way to understand this facet of a personal injury case is to understand its definition. Punitive damages are meant to punish—they are not directly tied to a tangible injury. Their primary purpose is not to compensate for a specific loss—although you are the party who will receive the damages—but to serve as a form of legal punishment for the actions of the defendant. Although punitive damages are rarely part of a personal injury settlement, they are generally taxable and must be included in your tax return.

Now, let’s talk about interest.
Most states have court-enforced rules that add interest to the verdict for the length of time the case has been pending. Generally, your case will begin accruing interest starting from the first day it was filed until your receive your compensation. All interest you receive from your court case is taxable and must be reported to the IRS.

What about suing for mental distress or anguish?
While personal injury cases deal with a wide range of damages, when it comes to filing against another party for any other sufferings besides the physical, tax matters shift. When there is no relationship between the emotional and the physical suffering, your settlement would not be tax-free. However, if you sustained any form of emotional distress during your ordeal that is directly linked to a physical condition, then your settlement would not be taxed by the IRS. Although such stipulations may be confusing to digest, it’s important to chat with both your lawyer and your trusted tax professional before you find yourself lost in a sea of tax forms.

Lastly, let’s target loss of wages/income.
If the compensation you receive in your personal injury settlement is solely meant to make up for a loss of income you suffered, it is taxable and must appear on your tax return. As settlements like this are similar to defamation suits, the IRS does expect you to file them.

If you received your settlement from your personal injury case this tax year, we understand your grief. At the J. Gonzalez Law Firms, it is our mission to help your sort through all that coincides with filing a personal injury suit—taxes included. As there are exceptions to almost every legal and tax-related rule, we encourage you to give us a call (contact info) and let us help you keep your head high this tax season!

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