We all know how difficult it can be to go through a personal injury. This is why if you are compensated for your injuries, there may be some important tax implications that you should consider. In this article, we will answer if personal injury compensation is taxable and when.
What is personal injury compensation?
Personal injury compensation is money received for any personal injuries sustained by you due to an accident or error by another party. It can be in the form of cash payments, paid medical expenses, vehicle repair costs, etc. This money would typically come in the form of a settlement agreement between an individual and a company or governmental agency that was responsible for the injuries sustained. It can also be a court order that requires payment to the individuals as a result of a lawsuit filed against another party accused of wrongdoing.
When is it taxed?
They are nontaxable and will not need to be reported to the IRS. They are typically tax-free as they are meant to reimburse one for expenses that he or she may have incurred due to their injuries.
If you receive a settlement for physical injury, part of your recovery may be taxable if it is related to emotional distress or lost wages not associated with the actual physical injury or sickness. You must report this part on your tax return as “other income.” For example, if you recover $20,000 for emotional distress and $20,000 for lost wages due to an accident in which you were injured, only the $20,000 for emotional distress is tax-free. The $20,000 related to lost wages is taxable.
Example of US Personal Injury Settlement
Mr. Smith had a car accident with Mr. Brown, who ran a red light and then caused $3000 worth of damage to Mr. Smith’s car. After negotiations, Mr. Brown agrees to pay for the damages in installments of $500 every month. The entire settlement will be tax-free, assuming that there is no other taxable income that was generated from the amount received.
Learn more: How to Win Your Personal Injury Case
How can a personal injury lawyer help?
An experienced personal injury lawyer will help you with any paperwork and documentation that may be required in order to receive your full compensation. Therefore, be wise and visit a personal injury lawyer in Gainesville, GA. They will also work on a contingency basis, which means they only get paid when you do, so their goal is to see that you receive the maximum amount of financial relief possible.
In some cases, where there is a low net income, some personal injuries can actually result in a tax refund. To conclude, as a general rule, the proceeds received from most personal injury claims are not taxable under either federal or state law.