A personal injury settlement occurs when the parties involved resolve the dispute without going to trial. In the vast majority of settlements, the injured party receives damages, or a single sum of money to compensate them. As a general rule, these settlements don’t count as an income for IRS tax purposes, although there are some exceptions.
Compensatory damages can be broken into special and general damages. Special damages are “economic damages,” monetary losses that can be easily measured and documented. These can include medical bills, lost wages, out-of-pocket expenses, and damage to personal property at the time of the injury.
General damages, however, are more difficult to calculate and often subjective. Pain and suffering, loss of enjoyment, and emotional distress fall into this category. Coming up with a claim for general damages is complicated, and hiring a personal injury lawyer can help clarify the process so you’re receiving fair compensation.
Since a settlement does not specify exactly what damages you are receiving, an injured person does not have to pay income tax on personal injury settlements.
However, as every case is unique, there are several situations where some, or all, of the settlement can be taxed. Should your claim be for only an emotional injury, the settlement or verdict will be taxable unless you can show the slightest amount of physical harm. Punitive damages, or those rewarded when the defendant’s behavior is found to be especially negligent, are taxable, as are lost wages should the jury or judge specifically award you wage loss.
After a case in 1997, the IRS declared that you also must pay taxes on confidentiality settlements. As you can see, these are complicated issues, so if you are injured because of someone else’s negligence, it can be helpful to consult a legal expert, like our personal injury attorneys in Everett, to learn how to allocate and specify your injury and confidentiality claims.
Questions about tax liability in personal injury cases? Looking for a Seattle or Everett personal injury lawyer? Contact our personal injury firm in Everett today for a free consultation to get the treatment and compensation you deserve.