If you've been awarded a settlement for a personal injury case, you're probably wondering, "Do I have to pay taxes on the money?" The answer depends on the type of settlement. If your lawsuit involves property damage, you're unlikely to owe taxes on that amount. In a personal physical injury case, however, your check will probably not be taxed, since lost wages are not considered taxable income under 26 U.S.C. SS 104(a)(2).
There are various ways to determine whether your settlement is taxable or nontaxable. The answer depends on the source of the award. For example, if you're a laid-off worker who received a lump sum for emotional distress, you won't have to pay taxes on this amount. On the other hand, if you were injured and won a settlement from a negligent building contractor, your damages would not be taxable. In either case, you should carefully consider your options when filing your taxes.
In addition to paying taxes on physical damages, you might also receive compensation for emotional distress and suffering. These damages are taxable income, just like any other compensation you received for sickness or injury. In addition, you can claim tax exemption for medical expenses related to your mental or emotional distress, including counseling sessions. But beware of other taxable income that you receive. You may be able to reduce your taxes by avoiding a hefty fine from the IRS.
If you have a large taxable settlement, you should consult a tax professional. Also, consider putting aside some of the settlement money for your tax bill, especially if you're in a higher tax bracket. Otherwise, you might wind up paying more than you originally expected in taxes. The IRS has concluded that at least part of your settlement is taxable. So, you should plan accordingly to make sure you don't end up with a huge tax bill in April.
If your settlement is based on physical injuries, it is taxable for you. The amount you receive in compensation is the full amount of the settlement, not just the attorney's fees. If you choose to keep it in an annuity or Treasury bond, the money from the settlement is not taxed. It's important to seek legal counsel before signing a settlement agreement. And don't forget to consult a tax professional before signing a settlement contract.
Although compensation for physical injuries and sickness is tax-free, emotional damage can be taxable. But you must prove that the distress stemmed from the accident. Lastly, if your settlement was for "punitive damages," you have to pay taxes on it. The IRS has to receive some of that money, so make sure you have a lawyer who can explain how this applies to your case. It's important to know the tax consequences of the settlement you won't receive.
Although determining the taxation of a lawsuit settlement is difficult, it's worth your time to get involved in the taxation process. There are general rules for the taxation of settlement money, but it's best to talk to a tax expert or an attorney to be sure that you're making the most out of your settlement. There may be tax benefits available to you by deducting some of the money from your taxable income.