his is one of the most common questions asked by victims of a personal injury, who are looking for compensation. It’s an important question. Typically, the answer is no. In some situations, “CERTAIN” components of a personal injury settlement may be taxed. For anyone interested – you can read the IRS’s remarks here: https://www.irs.gov/pub/irs-pdf/p4345.pdf. As a Long Island personal injury lawyer, I have had the distinct pleasure of seeing virtually every type of case. My answer stems from this experience.
As a general rule of thumb, proceeds from most personal injury claims aren’t taxed under either state or federal law. Regardless of whether you settled, or went to court. Neither the IRS, or state government, can tax you on the settlement or verdict.
Let’s take a step back. Most personal injury damages awarded are for things like: lost wages, medical bills, pain and suffering, monetary financial losses, and attorney fees. Any compensation you get, as a result of a physical injury or sickness, which is part of the claim – is not taxable.
Some exceptions do apply
If your personal injury lawyer is able to get you punitive damages, then those will be taxable. Typically, most personal injury lawyers are aware of this – and will ask the judge/jury to separate the punitive damages claim from the compensatory damages. This will help ensure that you can prove to the IRS that the verdict, for which you’re not paying taxes – was for compensatory damages.
If there is a delay in you receiving the proceeds from your verdict, and you accrue interest on it – then that interest is taxable. Many states have rules that add interest to the verdict for the length of time the case is pending. For example, if you filed your suit on January 15, 2015 – and it settles in June of 2016, then you would get interest for that period of time. That interest would be taxable.
Another exception to the rule, is with claims that only involve emotional injuries. Settlements/verdicts are only non-taxable, so as far as they pertain to physical injuries. If you are suing for emotional distress, then that claim would be taxable.
About The Author
This informative blog post about whether personal injury claims are taxable, was written by Marc Albert. He is a NYC personal injury attorney, whose website you can visit at: http://www.msainjurylaw.com/