Law

Do I Owe Taxes on My Personal Injury Settlement?

It is once again tax season. The key query is:

“Are settlements for personal injuries subject to income tax?”

The simple answer is no. However, there are several exceptions, as with most legal matters:

“Amounts earned as damages on account of physical injuries or physical disease are excludable from income,” the Internal Revenue Code’s Section 104(a)(2) states. To get more information, contact a Personal Injury lawyer.

The exceptions are as follows:

A: Punitive damages are intended to penalize the wrongdoer rather than pay the victim. $100,000 in the compensatory award: not taxable: $100,000 in punitive damages is taxed.

B: Interest on awards: Assume a $100,000 judgment is rendered in your favor for physical trauma or physical illness. The decision is challenged, and by the time the case is over, it has accrued $5,000 in interest. The $5,000 interest is taxable, but the $100,000 is not.

C: Emotional distress damages are taxed. However, the cost of paying medical bills to address emotional injuries is not taxable. A $100,000 judgment for emotional harm is taxable: $10,000 in compensation for treating emotional injuries is not taxed.

D: Because back compensation for job discrimination is not the result of a “physical ailment or physical disease,” it is taxed.

E: Income lost due to a physical condition for which you later receive compensation under a judgment is not taxable. The portion of your award that is $10,000 for your inability to work as a result of your illness or accident is not taxed. This includes earnings from disability or income replacement insurance policies and Workman’s Compensation payouts. Insurance policies for “overhead replacement” are taxed.

Most generic releases allude to “Damages on account of physical injury and/or disease” rather than distinguishing between damages paid for particular alleged losses. This qualifies the award as a tax-free event and covers the broad subject under section 104(a)(2) mentioned above.

The aggrieved party is not given any 1099 paperwork. Instead, they are given to the law company as the fees they get from clients are taxed. The settlement or award gross amount is represented on the issued 1099. The “assumption test” is then used by the IRS to examine whether the law practice is properly disclosing income from personal injury agreements. The aggrieved party is not required to report the settlement money as income if they do not receive 1099.

Naturally, as always, seek advice from a tax expert, but put your trust in your award for personal injury damages is a nontaxable event. This is one of the few remaining “gifts” under the tax code. Use It.

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