Victims who are awarded damages in a personal injury case are often shocked to discover that they do not receive the full amount of their settlements. Attorney fees and court costs must be subtracted from the total amount awarded, and victims may also need to pay taxes on their settlements. Taxes are just one factor in how much you can receive in an injury case—and depending on your award, taxes can reduce the amount by thousands of dollars.
How Much Tax Will I Have to Pay on My Injury Settlement?
The first thing you need to know is that the amount of tax that can be taken from personal injury damages depends on the particulars of your case. In addition, the same tax rules apply if you settle a case or win your lawsuit in court, although you will usually have a greater ability to reduce tax liability through a settlement. It is also important to know that only certain types of damages are taxable, and a personal injury case typically involves many different kinds of damages, including:
- Physical injury costs. Most of the costs that are directly related to injury and recovery are not taxable. These include medical bills, property damage, rehabilitation, assistive devices, and hospital stays. Any pain and suffering, emotional distress, or loss of consortium related to a physical injury is also not taxable under state and federal law.
- Lost wages. Lost income is considered taxable in some types of lawsuits, such as discrimination cases and breach of contract between an employer and employee. However, lost wages are not taxable in personal injury lawsuits.
- Emotional distress without an actual physical injury. The general rule about taxes in injury cases is that damages are exempt from tax if they are compensation for a physical injury. As a result, any amount awarded for emotional distress that exists without a physical injury will be taxable.
- Punitive damages. Punitive damages are an amount that the defendant is ordered to pay above and beyond compensatory damages in order to punish the defendant for negligence. Since the amount of these damages is typically assigned by the judge or jury and has no bearing on injury costs, this amount is always taxable. Verdicts are often separated into compensatory damages and punitive damages, making it easier for the victim to separate taxable and non-taxable items on IRS forms.
- Interest on a judgment. It can take several months to several years to receive the full amount of your damages. As a result, interest can be added to the final amount of your payment to compensate you for having to wait for the money you are owed. Interest on your damages is taxable, and can accrue from the date of filing the case until the damages are finally paid.
How to Minimize Tax Liability on Injury Damages
There are many ways to reduce the amount of taxes that are owed on damages, allowing a victim to keep a greater portion of his settlement. For example, most injury cases involve two claims: a claim for injury costs and a separate claim for costs that are not injury-related. Your attorney can examine your personal injury claim closely to determine if the non-injury costs are actually a direct result of injury, excluding a greater amount of damages from taxation. A good attorney will ensure that your claim is structured not only for the best chance of success but also to ensure the least amount of financial losses after your verdict is won.
It is worth noting that these are only general rules about taxation on personal injury claims. Your tax liability can vary widely with the specifics of your case, so the best way to understand the tax laws related to damages is to speak to a personal injury attorney about your claim. Contact our office today to speak with attorney John L. Griffith about how to begin your case, or download our FREE guide to personal injury cases in Tennessee to learn what to do after you have been injured in an accident.