How Much Of A Personal Injury Settlement Is Taxed By The IRS?

So you’ve settled your personal injury case. What is yours is yours, minus attorneys fees or any medical expenses that you owed, which had to be paid back to the doctors. But what about the IRS? After all, a settlement is money, and any time money is involved, the IRS will want its share.

What is Taxed?

As you may imagine, because your normal wages would be taxable, any money that represents a replacement for lost wages, will also be taxable. This usually won’t be a big tax burden, but you should be aware of your tax bracket and how much you could owe, so that you can calculate that when settling your case.

In some cases, you may be awarded a significant sum of money for future lost wages. In those cases, you could end up paying in a higher tax bracket than you normally would – the lump sum will increase your “earnings” for that year. There are ways around this, by working with financial professionals, who can help you structure a settlement in a way that avoids paying more taxes than you should.

Medical Expenses

Medical expenses, and reimbursement for anything that compensates you for damage or loss to your car, are not taxable. The same applies for any other kind of reimbursement—for example, if you had to cancel a trip because of your accident, and then got compensated to reimburse you for those expenses. That’s because you’re not getting extra money—you’re just getting money to replace something you’ve lost, or to compensate you for an expense.

There is one caveat with medical bills, however—if you have claimed them as a deduction on a prior tax return, you will have to pay taxes on them when you get them in your settlement. Your accountant can help you determine the best strategy, but make sure to tell him or her that you may be receiving a settlement or verdict that includes money for medical expenses.

Punitive Damages and Interest

Although not commonly included in personal injury settlement, punitive damages are taxable. Additionally, if you are paid any interest on any settlements, that is taxable also.

Non Economic Damages Aren’t Taxable

The good news is that money given for things like pain and suffering, anxiety, depression, or any emotional damage, is not taxable. Note that this rule only applies to injury cases. You would pay taxes on these damages in cases where you get damages without an injury, such as employment discrimination, or invasion of privacy cases. But not in personal injury cases, thankfully.

There are ways to negotiate and structure settlements, to minimize your tax burden. For example, structured settlements, paid out over time, can often reduce the amount of taxes that must be paid. Additionally, good faith classification of damages in your settlement agreement, can also demonstrate to the IRS that your compensation is for non-taxable damages.

We can help you maximize your recovery in your injury case. Schedule a consultation today with our Tampa personal injury attorneys at Barbas, Nunez, Sanders, Butler & Hovsepian if you sustain any kind of injury in an accident.