Tax Day is a month away, and if you were the recipient of compensation from a personal injury lawsuit or are currently embroiled in the process, knowing your tax liabilities stemming from your payout is extremely important. Most personal liability lawsuit settlements are paid out in one of two ways – lump sumps or installment payments spread out over months or years. Preparing your taxes for the upcoming year? This blog will give you the necessary information regarding filing and declaring your compensation.
Taxes – Necessary Or Not?
Despite many intricacies and possible situations resulting in settlement money being taxable, the primary answer is that most personal injury settlements are not taxable income. Through the process of investigating your case and ultimately taking it to court, your Florida personal injury attorney will be working with you side by side to gather documents and make a record of your actions related to your injury, such as dates and expenses associated with medical visits and therapy. After possibly working on your case for a year or more, your attorney should have a good understanding of which aspects of your settlement might be classified as taxable income, and this information can be forwarded to a tax attorney or accountant.
The reasoning behind classifying most personal injury compensation as tax-free income is that regulatory agencies such as the IRS do not consider settlements as income in the first place. The word ‘compensation’ is defined as ‘something, typically money, awarded to someone as a recompense for loss, injury, or suffering.’ When you are awarded compensation, it is designed to bring you back to the status quo before your injury or traumatic event. While money can’t solve every problem, the amount of money you receive essentially aims to help pretend the event never happened in the first place. You will only be awarded the amount of money that the court deems fair for your suffering, injuries, and incurred expenses, so there is no ‘extra’ money that could be claimed as income in most scenarios.
Continuing from this principle, settlements from cases involving serious bodily injury are almost universally considered tax-free. It’s impossible for a government agency or tax agent to clearly define how much money from a physical injury is warranted, how much is too much, or whether or not the settlement awarded by the court is excessive.
The structure of your payout also makes no difference if the payment itself is not taxable. Some people make a connection to lottery winnings, where the lump-sum payout method is drastically reduced because of upfront taxes. The only money deducted from your lump-sum settlement would be the percentage awarded to your attorneys based on your initial contract and agreement.
Taxable Settlement Income
If your experienced attorney assures you that your case is routine and your money is not taxable, you do not have much reason to worry. Still, there are some scenarios where portions of your money might be taxed. These include:
- Emotional damage/distress not caused by injuries.
- Punitive damages as they are calculated separately and intended to punish the other party.
- Reimbursements of expenses you already claimed as tax write-offs or deductions.
- Interest from settlement payouts or back payment.
If you were injured by a negligent party and received payment in order to take care of medical expenses and emotional distress, chances are you are not liable for any large tax bills when Tax Day arrives. However, address your concerns with your attorney or tax experts as soon as possible. Probinsky & Cole is a law firm specializing in personal injury and immigration cases in the South Florida area, and we are ready to help.
