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Are Settlements For Personal Injuries Taxable?

Most work is done when your injury case is resolved and you obtain a reasonable payout from an insurance carrier. You must, however, keep in mind the potential tax ramifications of any personal injury compensation. Personal injury settlements are generally not taxed, although there are several exceptions. Working with an attorney to properly handle your injury compensation for tax purposes is critical.

Most Personal Injury Settlements Are Not Taxed By The IRS:

The Internal Revenue Service has regulations governing the taxability of personal injury settlements and jury judgments. As per IRS publications, payments for bodily illnesses, in general, are not taxed by the national govt. These agreements are not included in your earnings for federal tax purposes.

This regulation, however, only applies if you did not categorize your medical costs linked to the injury in a previous tax year. You’d have to pay taxes on the medical component of your injury compensation if you did. It is to avoid obtaining a duplicate reimbursement for your medical expenses.

If you received a tax credit for your medical expenses as a deduction from the previous tax year, it would not be fair to keep the whole amount of your medical bill settlement without paying taxes. In this scenario, while filing your taxes, you must declare the portion of the compensation for medical expenditures.

Exceptions To The Rule Include The Following:

There are more exceptions to the IRS tax regulation. While settlements for physical injuries and diseases are not taxable, payouts for nonphysical damages like emotional pain and mental agony may be. It would be the situation if you got a settlement only for noneconomic losses, rather than emotional pain or mental suffering caused by a physical accident or sickness.

According to federal tax rules, any earnings obtained for noneconomic losses related to a physical accident or disease are not taxed. If you did not suffer a bodily injury and just received a settlement for noneconomic damages, you would have to pay federal taxes on this settlement or judgment award.

Tax regulations are confusing in general, but they become even more so when applied to a personal injury settlement or judgment award. Working with a legal practitioner, such as Brach Eichler Injury Lawyers, is the best way to guarantee you don’t pay excessive amounts in taxes on your injury settlement. An attorney might petition the courts to structure your payment to simplify taxation appropriately. Your attorney might ask for your compensatory and punitive damages to be separated in the settlement check.


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