Do Personal Injury Settlements Get Taxed?
What Is An Injury Settlement?
A personal injury settlement is where a party compensates another person for a claim against them due to an injury that was caused due to neglect, direct or indirect actions by that party and the arrangements are made out of court.
In other words, the defendant in the case pays the plaintiff for their medical and other expenses related to the injury such as loss of income or emotional distress without having to go to court to determine if they are liable or how much they will be held liable for.
Settlements are often preferable for both the plaintiff and the justice system. Personal injury law suits, especially where multiple injured parties are concerned or where a large claim is being made can take time to be heard in court and decision reached.
There is also no certainty as to whether the claim will be successful or that the plaintiff will be awarded the compensation in the amount that they requested. It is therefore considered to be a much better option to settle out of court to save both time and money in legal and other fees.
Do Injury Settlements Get Taxed?
Injury settlements are not considered to be an income and are therefore not generally taxed and should not be included in a tax return. However, there are a few exceptions to this rule.
If the amount for medical expenses was already submitted in a tax return, the settlement that is received for physical injuries will be taxable. In other words, if a tax refund was received for the submission of medical expenses related to the personal injury, the settlement amount will probably be taxed relatively.
Mental injuries such as mental anguish or emotional distress may also form part of a settlement but must be medical in nature and directly related to the physical injury in order to remain tax-free.
If the mental anguish is not related to the physical injury, then it is taxable and must form part of the tax return. However, not the entire settlement is taxable in this event and only the compensation that is related to the emotional claim will be taxable.
Settlements involving loss of income may be taxable as the compensation can be considered to be an income that the plaintiff would’ve received if they had not been injured and continued working.
However, settlements are commonly in the amount of the net salary or wages that the plaintiff would’ve received after they had paid tax and therefore may be non-taxable. If a settlement is received according to gross income, it will be taxable.
It is also important to take into account attorney fees on a contingency basis if any portion of the settlement is taxable. Contingency means that the legal fees will be paid out of the settlement amount but that the plaintiff will be responsible for paying tax on the full taxable portion before attorney fees are deducted.
It is highly recommended to get advice from an attorney or tax specialist to find out more about “do injury settlements get taxed?”
If you have any questions on your personal injury case, contact Asheville personal injury lawyer Lakota R. Denon, who has taken many injury cases to trial, as well as achieving high settlements for a number of clients.