Is a Settlement or Verdict Taxable? If So, When?
You’ve suffered injuries in a car wreck or tripped on a hazard on residential or commercial property. You’ve been unable to work, you’ve had significant medical expenses that weren’t covered by insurance or you’ve had to stop doing some of the things you love because of your injuries. You have a right to full and fair compensation for your losses. If you accept a settlement or win a jury verdict, will any of the money you receive be taxable? Let’s take a look at how the IRS treats personal injury awards.
The Key Issue—What Are the Damages Intended to Cover?
When assessing whether a damage award is taxable, the first question that tax authorities will ask is “what losses is the damage award replacing?” Remember that you have the right to seek full and fair compensation for:
- Unearned wages or income because of the accident
- Unreimbursed medical expenses arising out of the incident
- Any physical and mental pain and suffering related to your injuries or the accident
- Your loss of companionship or consortium
- Your inability to do the things that you enjoyed doing before the accident
- Any property damage or loss
You Don’t Have to Pay Taxes When the Compensation is for Physical Injury
As a general rule, if your settlement or verdict is intended to compensate you for a physical injury or illness, you won’t have to include it in your taxable income. Even those losses which are not, in and of themselves, physical injuries, such as loss of enjoyment of life or loss of companionship, won’t be taxable if they were the result of your physical injuries.
You Will Have to Pay Tax on Any Damage Award for Emotional or Mental Injury or Distress
On the other hand, any part of a settlement or verdict designed to compensate you for anxiety, distress or other mental injury will be taxable, unless you can prove that the emotional injury was directly caused by some physical injury. An award for scarring or disfigurement from an animal attack that causes you emotional distress likely won’t be taxable.
You Must Pay Taxes on Any Punitive Damages Received
Punitive damages differ from compensatory damages, as they are not related to your injuries, but are intended as a form of punishment for the wrongdoer. They are generally taxable.
Contact the Law Offices of David J. Karbasian, PC
Send us an e-mail today or call us at 856-667-4666 / 856-600-HURT to schedule an appointment to discuss your personal injury claim. Evening and weekend consultations are available upon request. We can come to your home or the hospital to meet with you, if necessary.
