One of the most common questions filed by injured plaintiffs is: "If I get a settlement, is it taxable?" The answer to this question depends on the type of lawsuit settlement you receive. If it involves visible injuries, it is not taxable, as long as the settlement exceeds medical expenses. If you're injured in a car accident or slip and fall, it's taxable only after medical expenses are deducted.
The amount of pain and suffering that you get from a settlement will depend on the severity of your injuries. While temporary discomfort is not considered "pain and suffering," a permanent pain or paralysis will be. The amount of pain and suffering damages awarded by the jury will be based on your level of pain, discomfort, and suffering. This portion of the settlement is also not subject to tax because it results from your physical injuries.
As long as you have a legitimate claim for your injury, it is important to remember that the settlement is taxable, just like your regular paycheck. It's a form of income from the very beginning. Some lawsuits involve punitive damages, which are taxed if the recipient suffers harm. Additionally, you will have to pay taxes on any interest that you receive from a settlement.
It's important to seek legal advice before accepting a settlement offer. An attorney can explain the differences between taxable and non-taxable damages and the tax liabilities associated with each. An inadequately structured settlement can end up costing you thousands of dollars in taxes and causing you headaches with the IRS. In addition, if you fail to include the taxable portion of your award, you may end up with a big tax bill.
While a check for property damage is unlikely to be taxable, payments for lost wages in personal physical injury cases are not. These payments are excluded from income tax as a result of 26 U.S.C. SS 104(a)(2). However, if you are injured due to someone's negligence, the settlement can be taxable, causing a higher tax bill. Consult a tax professional before receiving any settlement.
When determining whether a settlement is taxable, you need to decide whether or not it's physical or emotional. If the money you receive for mental or emotional distress is based on the injury, it's taxable. In addition, you'll have to pay taxes on your attorney's fees. Unless your attorney is legally required to pay the money, your settlement is probably taxable.
When determining whether a lawsuit settlement is taxable, consult with a financial advisor. Most lawsuit settlements are not taxable unless you have to reduce your basis in your property by the settlement amount. Any amount above that threshold will be considered income if you don't itemize the costs of legal services. This is the same as the recapture issue. The best way to determine whether a settlement is taxable is to consult your financial advisor or tax expert.