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How a Personal Injury Settlement Might Affect Your Taxes

Winning a personal injury settlement can be a major victory for you and your personal injury lawyer Fort Lauderdale FL. However, it’s important to keep in mind that your award could affect your taxes.

A personal injury award could impact your income taxes significantly, depending on the type of award you receive. Whether or not you pay tax on any of the amount awarded depends on the types of damages you receive. Although the federal government has established guidelines for how taxes are calculated on personal injury settlements, these rules can be somewhat confusing. This may be particularly relevant if the settlement is large and if several types of damages are awarded.

Punitive Damages

Punitive damages may be ordered as a way of punishing the party that was responsible for causing your injury. Punitive damages may be awarded in cases where there was gross negligence or a if willful violent act caused significant harm. This type award is almost always subject to income tax as it is viewed as income by the IRS. The amount of tax you owe will vary based on the amount that you receive and other personal factors.

Lost Wages

Another common type of award is for lost wages. Since this money is intended to make up for salary that you lost, you will likely be required to pay taxes on that amount. The amount of tax you owe could potentially be affected by other types of awards that you receive as well, so consulting a professional may be necessary to ensure that you pay the correct amount.

Compensatory Damages

Compensatory damages are intended to reimburse you for expenses you incurred as a direct result of your accident. The amount of compensatory damages awarded can vary, based on specific individual factors.

Compensatory damages include medical expenses, lost wages, and other tangible costs that may apply to a specific case. If you do not take a tax deduction for these expenses, then that money might not be taxed. However, if you have received a tax deduction on the amount you paid, then you may be required to pay taxes on that amount. If your own compensatory damages account for wages that you lost, then you may be required to pay taxes on a portion of your award.

Reimbursements for damaged or lost property are typically not taxed (except in cases where unless the amount awarded is greater than the value of the property). If the amount awarded exceeds that value, then that amount is considered income and will likely be taxed accordingly.

In complex cases, it can be difficult to parse out the correct taxable amount. Talking with a tax attorney can help you figure out what you need to set aside to pay at the end of the year.

Although the federal tax liability guidelines for personal injury awards are intended to clarify the tax issue, they are still open to interpretation. In some cases, understanding the amount of tax you owe can be very complicated. It may be beneficial to speak with an attorney who is familiar with the tax laws in your state. Receiving trusted legal counsel may be the most effective way to ensure that you avoid penalties and other negative consequences of incorrect tax payments — while still receiving the compensation you rightfully won.


NeedleThanks to our friends and contributors from the Law Offices of Needle & Ellenberg, P.A. for their added insight into personal injury settlements.

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