Perhaps you have spent the last few months—or even years—embroiled in a personal injury claim. You are relieved to hear that your claim has finally settled for an equitable amount, and you now wonder whether your award is taxable. The answer to that question depends on a number of factors associated with your case.
You may be receiving one or more of the following: compensation for your medical expenses, compensation for any lost wages due to your physical injury and inability to return to work, compensation for emotional distress due to your physical injuries or illness, and compensation for physical injury or illness.
The money you receive to compensate you for your medical expenses will be in a different category than the money you receive to compensate you for your lost wages. In general, your tax liabilities will be as follows:
- Compensation you receive as a result of your physical injuries or illness stemming from the accident will not be taxed. This includes all of your medical expenses, whether for ER visits, personal physician visits, any type of rehabilitation therapy, nursing care, and prescription medication expenses.
- Lost wages compensation is taxable—just like the wages you earn are taxed, any compensation received as a replacement for what you would have earned if you had been able to work will be taxable.
- Compensation received for pain and suffering damages is usually not taxable, as they go hand in hand with compensation received for physical injuries and medical expenses associated with those injuries.
- Damages you receive for emotional anguish may be taxable. Emotional anguish is different than physical suffering, therefore, you may be required to pay taxes on the amount set aside for emotional anguish.
- Punitive damages are awarded when the person responsible for your accident was willfully or recklessly negligent. If you receive punitive damages, that amount is taxable.
Remember, it will be up to you to show your personal injury payments are not taxable. The IRS is allowed to look at the pleadings in your case, discovery documents and anything else which could be helpful in determining the real purpose of your award. The language of your judgment is crucial, and it must clearly state what funds are meant to compensate you for which issue. They must be broken down by category.
Your attorney may be able to maximize your pain and suffering damages, minimizing punitive damages in order to reduce your overall tax liability. If you will owe taxes on any part of your award, you can send an estimated amount to the IRS immediately, or set funds aside in a special account until tax time rolls around.
The information in this article is general and educational. It is not legal or tax advice. You should always consult a competent tax advisor concerning your unique situation prior to taking any action which may be affected by tax laws.
Have You Been Injured in an Accident?
If you’ve been injured in an accident in Daytona Beach, Florida and you believe that someone else’s negligence was to blame, it is important to speak to an experienced personal injury lawyer as soon as you are able. At Zimmet & Zimmet P.L., our experienced Daytona Beach personal injury lawyers have extensive experience representing injured accident victims. Contact us today for a free initial consultation and review of your case. Call (386) 255-6400 or fill out our confidential contact form and we can help you through this difficult time.