Tax season is back, and yet it always seems to sneak up on us. Filing your taxes is complicated, and if you’ve received a personal injury settlement in the last year, you may be worried it’s about to get even more complicated.
Many of our clients worry that the IRS or the state of Louisiana will lay claim to a large percentage of their settlements.
Luckily, personal injury settlements are NOT taxable.
What Types of Settlements Are Taxable?
Section 104 of the Federal Tax Code says that any settlements meant to compensate physical harm (injury and illness) do not qualify as income and are not subject to tax.
You file a wrongful termination lawsuit and receive compensation for your lost wages and emotional distress. This settlement is taxable.
You file a personal injury lawsuit and receive compensation for your medical expenses (treatment for your injuries), lost wages (caused by your injuries), and emotional distress (caused by your injuries). This settlement is NOT taxable.
You file a workers’ compensation claim and receive compensation for your medical expenses (treatment for your injuries). This settlement is NOT taxable.
You file a premises liability lawsuit and receive compensation for your medical expenses (treatment for your injuries) and punitive damages (money awarded to victims by the court to punish the offender). Your compensatory damages (medical expenses) are NOT taxable. Your punitive damages ARE taxable.
Settlements that compensate for injuries are tax-free regardless of how they are paid. This includes by lump-sum, installments, through negotiation with the insurance company, and by court order.
Is My Personal Injury Settlement Ever Taxable?
Depending on your individual case, portions of your settlement may not be tax-free. There are two major exceptions to the tax-free rule:
- You accumulated interest on the settlement. The interest is taxable, but the settlement is not.
- You deducted your accident-related medical expenses on a previous tax return. The portion of the settlement you receive for medical expenses can be taxed up to the amount you deducted. If you received compensation for other damages (lost wages, pain and suffering, etc.) those portions will remain untaxed.
When your settlement is determined, your lawyer will work with the defendant and their attorneys to determine if any portion of the settlement is taxable so you won’t be caught off-guard with a 1090 tax form in the mail.
So there you have it. When you are injured through no fault of your own, getting compensation can be tough, but you can rest easy knowing that the settlement the team at Broussard & Hart works hard to get you is yours to keep once your check arrives.