If you have been injured due to the negligence of someone else, you may be contemplating filing a personal injury lawsuit. A personal injury settlement can provide you and your family with valuable compensation for your injuries and related expenses.
Most personal injury clients wonder how much of their settlement they will actually get. There are considerations like an attorney and legal fees, and also taxes. One of the most common questions that personal injury attorneys are asked is “do I have to pay taxes on my personal injury settlement?” Let’s take a look at the answer.
Do I Have to Pay Taxes on My Personal Injury Settlement?
The general rule of state and federal law is that compensation for physical injuries is not taxable. That means that you will not have to pay taxes on the portion of your settlement that compensates you directly for your physical injuries. The non-taxable portion of a settlement includes compensation for:
· Medical bills
· Lost wages
· Pain and suffering
· Emotional distress
· Attorney fees
There are portions of your personal injury settlement that may be taxable, however, depending on the details of your case. Exceptions to the general rules include compensation based on:
· Breach of contract
· Punitive damages
· Interest accrued on a judgment
There may be other exceptions depending on your case. Your personal injury attorney can help you determine what these exceptions may be.
Things to Remember about Taxes and Personal Injury Settlements
Remember that in order for your settlement to be non-taxable, it must involve a physical injury or illness. If your claim relates to emotional harm due to employment discrimination, your settlement will be taxable.
Furthermore, if your personal injury lawsuit involves more than one claim – one physical and one not physical – you may have to pay taxes on any compensation that you receive for the non-physical injury claim. Make sure that you and your attorney clearly identify the damage amount that you are seeking related to physical injuries versus any non-physical injuries.