Do I Have to Pay Taxes on a Personal Injury Lawsuit Award?

Mon, Aug 24, 2015

Personal Injury

7658205070_cb49629afd_bNothing is certain but death and taxes, right? You must pay taxes on anything you earn. This is in the form of wages, interest, capital gains, etc. Plenty of things are considered earnings, even those things you might not want to be counted. Sometimes it is hard to tell how and when you should report something on your taxes. Personal injury lawsuits are no different.

Luckily, one typical exception to taxation for earnings is an award from a personal injury lawsuit involving physical injury. This is great news for those already suffering the financial stress and strain of paying for injuries sustained due to the incident. So, having dealt with pain and suffering from physical injuries, the knowledge that a physical injury award is not taxable can go a long way toward setting a better future course.

However, many personal injury lawsuits include damages for emotional struggles or mental anguish along with physical injuries. Awards for only emotional damages are not tax exempt; there must be at least some physical injury as part of the claim—it is imperative that physical and emotional awards are clearly separated. For many years, awards for all types of personal injury were not taxable. However, now cases involving only emotional injury are no longer tax exempt. Examples of emotional injury are sexual harassment, employment issues and disputes, or damages due to some sort of emotional event.

Punitive damages are a monetary award sued for as a deterrent for actions (an example may be a bad-faith insurance suit).  Punitive damages are not tax exempt.  Awards for lost wages and lost profits are also taxable. Finally, any interest on awards is taxable. This happens for particularly long trials where the verdict is delayed and interest may accrue in an account.

The idea behind not taxing physical injuries is that this type of award is just taking a person back to where they were before the incident (making them “whole”). In some ways, you could compare it to an insurance policy, in that the pay-out on the policy is bringing you back to the state you were before—but no more. The monetary awards are just paying to get you to the same place since they are paying you for the costs of repairing your physical damage.

The document that discusses these tax decisions is found here. A particularly clear explanation of these tax issues is found here. These can be handy guides in determining whether the settlements in your personal injury award are taxable.

Attorney Christopher D. Smith, Sr. is designated a Board Certified Consumer Bankruptcy Lawyer by the American Board of Certification.  SmithLaw is located in Lakewood Ranch, Florida.  Attorney Smith concentrates on bankruptcy, civil litigation, probate, estate planning, and elder exploitation cases in the Sarasota and Bradenton area.  Call 941-202-2222 to learn more.  SmithLaw offers free consultations in certain areas, including consumer bankruptcy, probate, and personal injury matters.

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