We are occasionally approached by clients who are unsure whether or not they will be required to pay taxes on the funds they receive from their verdict or settlement. It may be thrilling to win a personal injury case, but the sudden thought of a large tax burden can really toss a wet blanket on your happiness. Fortunately, for those people, there is some good news: most types of damages you may receive are tax exempt. Let’s look at the laws in a little more detail.
Two Types of Damages
There are two types of damages you can receive as part of a personal injury lawsuit: compensatory damages and punitive damages. According to IRS code 26 C.F.R §1.104-1, compensatory damages are not subject to taxation. The best news for injured parties: most of your settlement is compensatory damages, including your medical bill reimbursements, rehabilitation treatments, medical equipment, pain and suffering, and even emotional distress. Money you receive for any property damage you sustain, such as your car being damaged, is also not taxable.
In fact there is just one type of compensatory damage that is taxed: compensation for lost income from work you miss as a result of your injury. The logic for this decision is that this money would have been taxed anyway if you had not been injured, so you really aren’t foregoing anything you wouldn’t have otherwise lost to taxes already.
The second type of damages, punitive damages, are a special case since it’s not likely you even received any. These are not guaranteed in your case, and in fact are rarely awarded at all. Punitive damages exist purely as a tool to punish those who demonstrate extreme negligence or blatant disregard for the safety of others, resulting in your injury. By awarding punitive damages, the judge in your case is likely hoping that it will dissuade them from ever repeating these negligent actions again. While punitive damages can substantially add to your verdict amount, they are almost always taxable and will add to your overall tax burden for the year.
Your attorney should be able to provide you with a good amount of information regarding your tax liability, but it’s important to remember that they may not also be a tax attorney, so you should always seek the advice of a tax professional if you would like more specific information based on the potential outcome of your case.
At Erskine & MacMahon LLP, our Longview personal injury attorneys are dedicated to help you get the settlement you deserve after you are injured in an accident. We understand that everyone deserves justice, but recognize that justice is not always guaranteed and sometimes must be fought for. We offer experienced and award-winning personal injury counsel, and can provide you with the counsel you need on your side to fight for you when you have suffered a life-changing injury. Our recognitions include an Avvo Clients’ Choice award, selection to Super Lawyers®, and selection as one of the Top 100 Trial Lawyers by The National Trial Lawyers.Have you been injured? Review your legal options now! Call Erskine & McMahon today at (903) 500-2490 to receive a free case evaluation.