Death and taxes—two things that, as the saying goes, are inevitable in life. The government takes its cut from just about everything we make. Many people wonder whether or not this also applies to personal injury settlements. If you’ve been hurt in an accident and you get a sizable settlement from the other party, do you need to pay taxes on the money you’ve made? Does it “count” as income? These are good questions, and ones that many don’t even consider. Here’s an overview of the taxability of personal injury settlements, if and when you need to pay taxes, and how a personal injury lawyer can help.
Don’t Sweat It
The first thing to keep in mind is don’t worry too much about this out of the gate. Whether or not your settlement or judgement is taxable depends on the nature of the award, but your tax advisor and attorney will help you work out the details. Know also that in the eyes of the tax code, for the most part a settlement is the same as a judgment, so it doesn’t matter if you got your money through negotiations or by going to court.
When You Don’t Need to Pay
“Compensatory damages,” or damages that compensate you for the costs incurred for medical settlements, injuries, property damage and the like is not taxable income. This money is reimbursing you for money that you have spent or are spending, and thus, can’t be taxed. It’s not “new” money and it’s not a gift, so there’s nothing to tax, in the eyes of the law.
When You Do Need to Pay
If, however, you receive compensation for lost income, future potential or the like, you will have to pay income tax on that money. The reason is that this money is replacing the money you would make at your job, for which you would have paid income taxes. Since the original income had you not suffered an injury would’ve been taxable, the income replacing that money is also taxable.
Personal Injury Lawyer and Tax Advisor
Only your tax advisor can give you full information about whether you’ll need to pay taxes based on the circumstances at hand. Your personal injury lawyer should be able to give you a general idea of where you stand at the outset, however.
In general, damages for things like pain and suffering, lost relationships and companionship and the like could be viewed as compensatory or income. Punitive damages are rare, but sometimes do occur. When they are awarded, since these damages are “new” money that represents income you didn’t have before, they are almost always taxable.
If you’ve been injured in an accident and need representation, worry first about getting the compensation you deserve. Taxes will come later. Read more about our vehicle accident services, and get in touch with us to discuss your case with no obligation today.