It’s a big relief when you reach an acceptable settlement on your injury claim. The settlement is a welcome relief for your mounting bills and your suffering. Even though it’s time to celebrate the result in your case, there are important things to think about to make sure that your rights are protected under the law.
After working diligently with your personal injury attorney and the other side to reach an agreement, you will need to consider the tax implications of the deal.
Is My Personal Injury Settlement Taxed?
One of the important things to think about when you’re putting the finishing touches on your personal injury claim is taxes. You may be wondering whether your settlement is taxed in Florida. If it is, you’ve got to pay your taxes and keep Uncle Sam happy. Here’s what you need to know about whether you have to pay taxes on your Florida injury settlement.
Your Personal Injury Settlement May Be Taxable
The answer to whether you have to pay taxes is maybe. It depends on what the settlement is for. Payments that compensate you for medical bills are different than payments that compensate you for lost wages. Some types of compensation in an injury case are taxed, and others are not. Here are the tax liabilities for a personal injury settlement broken down by category:
Medical bills are not taxed. Any compensation that you receive because of physical injuries or sickness is not taxed. That includes all of your medical bills. Whether your compensation is for emergency care, follow-up visits, physical therapy or nursing care, you don’t pay taxes on payments that you receive because of your physical maladies.
Pain and suffering:
Pain and suffering damages are usually not taxable. They go along with compensation for your physical injuries and sickness, so you can avoid tax liabilities when you collect compensation for pain and suffering.
Compensation for your lost wages is taxable. Just like the wages that you earn are taxed, compensation that serves as a replacement for what you would have made if you had continued to work is taxable.
Damages for emotional anguish are different than damages for physical suffering. Because emotional anguish isn’t physical suffering, emotional suffering damages usually require you to pay taxes.
If you receive interest on any portion of your settlement, you may have to pay taxes on just the interest portion of your payment. Because interest payments go above and beyond your compensation for physical injuries and losses, you may owe taxes on interest that you receive as part of your settlement.
Punitive damages also go above and beyond compensation for your physical losses. If you receive punitive damages, what you receive is subject to tax.
Who Makes the Rules About Whether a Personal Injury Settlement Is Taxed?
It’s the IRS that makes the rules about taxing injury settlements. The regulations for taxable income are in Internal Revenue Code Chapter 104. The law lists exceptions to things that are taxable income.
Specifically, the law says that payments you receive because of personal injury or sickness are exempt from taxable income. The law lists several other categories of payments that are exempt from taxable income. Many of the other categories relate to injured military service members.
How Does the Irs Decide Whether My Injury Settlement Qualifies as Compensation for a Personal Injury?
If the IRS questions your tax liabilities, they look at the totality of the circumstances to determine what the money is for. They start by looking at the language of your settlement judgment or the jury verdict. That’s the most important document to prove that your compensation is for physical injuries.
However, the judgment alone might not be the end of the story. The IRS can go beyond the judgment and look deeper into the facts of the case. If the language of your judgment isn’t consistent with your actual injuries and losses, the IRS might doubt the true nature of your recovery. It’s up to you to show that your payments aren’t taxable. The IRS may look at the pleadings in the case, discovery and anything else that might be helpful in determining the real purpose of your settlement funds.
What Can I Do to Protect Myself and Minimize My Tax Liability?
If you’re preparing a personal injury settlement, there are things that you can do to minimize your potential tax liability. Even though it’s not the only thing that the IRS might consider, the language of your judgment is essential. It’s not enough to draft a judgment that says that you receive a certain number of dollars as compensation for your injury settlement. Instead, your settlement needs to clearly state what those funds are meant to compensate you for. The settlement funds need to be broken down by category.
When you’re drafting your settlement, it’s important to look at the facts of your case and where your losses actually lie. For example, you can maximize your pain and suffering damages and minimize punitive damages to reduce your tax liability. Your lawyer can help you make sure that your settlement is drafted in a way that works to your advantage and is appropriately supported by the evidence in your case.
It’s also important to make a plan to pay the taxes that you might owe on your settlement. You may prefer to send the estimated amount to the IRS immediately. You may also prefer to set the funds aside in a special account. Either way, it’s important to have a plan to meet your tax obligation.
How Can an Injury Lawyer Help Me?
At Jack Bernstein, Injury Attorneys we are dedicated to giving your case the special attention it deserves. Our team of experts knows this individualized approach offers clients the best chance of a successful outcome in their case. We have the experience to ensure your tax liability is as small as possible.
If you need help understanding the tax liability in your injury case, contact us at call us at (813) 333-6666 or fill out our contact form to schedule your free case evaluation. There is no fee unless we win.