Personal injury lawsuits protect the rights and well-being of people after all sorts of accidents. Whether your injury was caused by an 18-wheeler driver without enough sleep or a chemical plant accident, you’ve been through an immense amount of tragedy and stress. The financial compensation from a settlement or jury award can provide some relief as you start to pay off medical bills and regain some of your lost income.
When you are facing the decision to file a personal injury lawsuit, you might think that the idea of being compensated for all you’ve lost and suffered is too good to be true. You might even be wondering if the catch is that there’s more stress to come at tax time. While there is no amount of money that can make up for your injury or the wrongful death of a loved one, an experienced wrongful death attorney will help you understand the impact of the IRS code on how your lawsuit should be filed. With this knowledge, your lawyer can work to maximize the amount of compensation available to you, and you can breathe a bit easier.
Is Compensation for a Physical Injury Taxable?
In order to tax you for money you take in, the IRS must decide that it is taxable gross income. According to the IRS code on compensation for injuries or sickness, the following kinds of money received in cases of personal injuries or sickness are not considered gross income:
- Money received under workers’ compensation claims
- Non-punitive damages received in a settlement or agreement
- Non-punitive damages awarded in a lawsuit by a judge or jury
- Non-punitive damages, whether paid in a lump sum or in payments
- Compensation from accident or health insurance company
The IRS also includes other categories of non-taxable money people may receive, such as payments for injury in a terrorist attack, death benefits for the family of a law enforcement officer killed in the line of duty, or pensions or disability payments paid to anyone who was injured in active service in the armed forces of any country.
Because these forms of payment are not considered income, they are not included on your tax return and will not be taxed by the federal government. These kinds of damages are a form of non-punitive, compensatory damages. Because Texas does not have an income tax, they are not taxable at the state level, either. Even if you move to another state that does have a state income tax by the time your compensation is awarded, don’t worry. Aside from the exceptions you will learn about below, compensatory damages are not taxable anywhere in the United States.
Is Money for My Pain and Suffering Taxable?
As long as your pain and suffering is the result of a physical injury, then it is compensatory and it will not be taxed. Pecuniary damages are concrete damages that can be added up, such as the grand total of your medical bills so far, or even the predicted total of your future medical bills. Pain and suffering are considered non-pecuniary losses because they are more abstract. Even though a personal injury lawsuit assigns a value to pain and suffering, it cannot objectively be calculated.
Actual damages, also called economic damages, are awarded in order to compensate plaintiffs for the kinds of costs associated with an injury that have a set value assigned to them. These may include:
- Medical and hospital bills
- Medical treatments
- Rehabilitation costs
- Physical therapy
- Ambulance expenses
- Medicine and prescription drugs
- Nursing home care
- Domestic services
- Medical equipment
- Lost income
- Increased living expenses
- Property replacement or repair
- Adaptive housing and transportation
Non-economic damages, including for pain and suffering, are awarded to compensate for injury-related damages that are more difficult to assign a value to. These may include:
- Mental anguish
- Future medical expenses
- Future lost wages
- Long-term physical pain and suffering
- Loss of consortium (companionship)
- Loss of enjoyment of life
- Loss of opportunity
Your lawyer will work to investigate and litigate your case to the fullest extent to maximize your recovery for compensatory damages so that you can focus on healing and recovery.
Are Punitive Damages Taxable?
Punitive damages are taxable in their full amount. Punitive damages, unlike compensatory damages, are intended not to compensate the victim but rather to punish the defendant for negligence. Punitive damages make a statement.
While punitive damages do have a limit (they can’t exceed more than two times the amount of economic damages, plus the amount equal to non-economic damages) there is no limit on how much can be taxed. The award amount is often intended to provide a sense of retribution to the victim. Furthermore, punitive damages send a message to the defendant and to future bad actors that their actions will come with dire consequences.
After your settlement or verdict, your lawyer will request that the judge specify how much of your recovery is compensatory and how much is punitive. This will allow you to anticipate the taxes you’ll have to pay.
When You Do Need to Pay Texas on a Personal Injury Settlement
Under some circumstances, you will need to claim portions of your settlement as income and pay taxes on it to the IRS. Other times, expenses you may expect to be tax deductible are not.
- Interest: Resolving a lawsuit can take a long time. Any portion of the award that represents accrued interest on the award will be taxable, which may impact some cases with long appeals processes.
- Prior deductions: You are allowed to deduct medical expenses every year. If you deducted your medical expenses before the resolution of your personal injury case, you will need to claim that as additional income on your next tax return following the resolution of your case.
- Attorney fees: Personal injury awards are taxable in their full amount — meaning the total amount of the award before your attorney receives their fee. Because attorney fees are no longer tax deductible, you must pay taxes on the full amount of the award (but, again, only if there are punitive damages and/or previously deducted medical expenses).
Generally, the IRS will not dispute your reporting as long as it aligns to the terms of the settlement or verdict. If you end up needing to pay taxes on any of your recovery amount, you may need to pay an estimated tax before it’s time to file.
Changes made to the tax code in 2017 have made it more difficult for lawsuit plaintiffs to keep the full amount of their recovery, whether awarded by settlement or by judgment. In order to avoid surprise tax bills and further financial stress after all that you have already been through, your attorney should be able to help you understand which taxes will need to be paid on the money you are seeking.
How Can FVF Help Injured People Get a Settlement?
We know that the legal complexities of an injury case add confusion and distress to an already difficult time. That’s why we offer free, no-commitment case consultations. Our goal is for you to leave your conversation with FVF feeling less overwhelmed and more confident about your next steps, whether or not they include us.
Because FVF operates on a transparent contingency fee basis, we make sure that you always know what to expect with regard to your maximum recovery amount, and we can help present the strongest case to maximize the value of your case. Contact us today to schedule your free consultation with our Austin personal injury attorneys.