Are compensatory damages taxable? In general, no. However, there are exceptions. For instance, a judgment in an injury case is not taxable if the victim did not sustain a physical injury. If the plaintiff suffered a permanent disability, a jury's award of compensatory damages may be taxable. If the plaintiff is awarded a settlement that replaces lost wages or medical expenses, the amount received may be taxable.
In calculating compensatory damages, you must take into account both current and future losses and the value of future difficulties and suffering. The former is calculated by considering medical expenses, property damage, and lost wages. The latter is based on the extent of pain and suffering a plaintiff suffered, which is more difficult to quantify. Non-economic damages are those that are not based on monetary value. In addition to economic damages, non-economic damages include pain and suffering, diminished quality of life, and emotional distress.
Similarly, the IRS considers punitive damages as income. Such damages are intended to punish the other party, and act as punishment. These damages are generally included in settlements. Punitive damages are sometimes referred to as "exemplary" damages. In general, however, they must be reported as income. To avoid a potential tax liability, seek legal advice from a Louisiana attorney about the tax implications of your compensation. If you're awarded compensatory damages, you won't have to pay income taxes on it.
There are a few exceptions to the taxable treatment of compensatory damages. In some cases, visible injuries are exempt. These damages are not reported to the IRS and the person who received them can keep their tax-free cash. However, other types of damages are taxable, so you should consult with an accountant or tax attorney before accepting an award. The Wheale Law Firm cannot provide tax advice. However, we can provide some general information that may be helpful.
While compensatory damages are often tax-exempt, punitive damages are not. Punitive damages are often taxable, depending on how they are labeled and the structure of the settlement. For example, if a person receives a settlement that includes compensatory damages, the money is taxable only if the recipient suffered a physical injury. A similar rule applies to emotional injuries, but the latter may not be taxable.
A bodily injury awarded in a personal injury lawsuit may be taxable. The IRS considers whether the pain and suffering was caused by the physical injury. Emotional distress is not taxable. Despite being a physical injury, however, can cause significant emotional distress. Therefore, damages awarded for emotional distress must be disclosed and taxed accordingly. When you receive a compensation award for emotional trauma, make sure you disclose the fact that you suffered physical symptoms as a result of the incident.
Compensation for lost wages may be taxable, if the collision prevented you from earning money. This is because the compensation replaced the lost income. A tax expert will be able to advise you on how to maximize the settlement. A qualified personal injury lawyer will help you maximize your compensation and avoid tax complications. This is the reason why so many personal injury attorneys recommend seeking legal counsel when considering accepting a settlement. So, how can you maximize your settlement and avoid paying taxes on taxable amounts?