If you've been hurt in a lawsuit, you may be wondering: Is lawsuit money taxable? The answer is yes, but only if you've received a tax return. Personal injury claims are often exempt from federal income taxes. According to IRS training manuals for lawsuits and settlements, the amount of personal injury compensation can be exempted only if the plaintiff's injuries were serious, or the injury was the result of physical illness or an accident.
The IRS considers most of the money that is awarded as taxable income. For example, if the plaintiff has been awarded back wages from a W-2 job, the money would be taxable. Income taxes and FICA taxes would be withheld from this amount. By contrast, a lawsuit settlement is treated like a normal paycheck - a form of income that should have been paid. Therefore, it's best to consult a professional accountant before accepting a large settlement.
Depending on the type of lawsuit settlement you receive, the amount of your settlement is likely to be taxable. Generally speaking, damages for physical injury are not taxable, but if you've already claimed a deduction for medical expenses, the money may be taxable. Furthermore, you can't claim the same tax break twice. In other words, if you've received a settlement from a class action, it's probably taxable.
While winning a lawsuit is exciting, it can also be taxing. While winning the lawsuit is the ultimate goal, the money you receive is not yours to keep. It's easy to forget about taxes until tax time rolls around. Therefore, it's essential to consult an accountant and attorney before filing for taxes. They will help you decide what to include on your tax return. If you're unsure of how to report your lawsuit money, work with an attorney and accountant.
Although compensation for personal injury is not taxable, punitive damages are. These funds are taxed by the federal government as ordinary income. For example, an award of lost wages or severance, as well as emotional distress, will be treated as ordinary income. Even if your lawsuit money is taxable, you may be able to deduct it through medical expenses. It's important to keep in mind that you can't claim the same tax break twice.
However, if you're lucky, you may be awarded millions of dollars. For personal injury cases, you might get as much as $1 million. While the majority of these settlements are tax-free, you may receive punitive damages if the other party committed a criminal act. Punitive damages are meant to punish the wrongdoer by making them pay a price. However, if you're lucky enough to win a lawsuit, this money is taxable in both the pre-judgment and post-judgment periods.
The IRS has recently changed tax regulations. Previously, personal injury settlements and awards were tax-free if they were awarded because of physical injuries or illnesses. However, the tax code does not specify a specific definition of "physical," but it does require visible harm. If you've been injured, and you have lost your job, your settlement money will likely be tax-free. But if you've been emotionally traumatized, it's best to consult with an accountant or other professional before you accept the settlement.