The IRS will consider your pain and suffering settlement taxable if you receive any financial benefit for emotional distress. However, this compensation must be reported separately from your other income. Your settlement amount can be reduced by medical expenses that you are eligible to deduct. However, if you have incurred any additional expenses for emotional distress, these costs will not be deductible. You should report the net taxable amount as Other Income on your tax return.
To determine whether your pain and suffering settlement is taxable, the IRS will look at the total circumstances involved in your case. Generally, they will start by analyzing the language of your settlement judgment, to see if the amount you're awarded is based on the pain and suffering you suffered. Once they've determined that you were compensated for physical injuries, they can begin looking deeper into the details of the case. If the amount you're awarded does not correspond to your actual loss or injury, the IRS will probably ask questions about this.
In general, a pain and suffering settlement is taxable if you received compensation for emotional distress. But a judgment for pain and suffering will not be taxable if you've suffered no physical injury. The same is true if the verdict is for employment discrimination. In either case, the insurance company will cut only one check. So, if you receive a pain and suffering settlement, make sure to determine what percentage of it will be taxed.
If you've suffered a physical injury and you're unable to work, you can still collect pain and suffering damages as part of your personal injury lawsuit. However, your pain and suffering damages may be considered non-economic by the IRS and taxable. In addition, if you have back pay, you will have to pay tax on the money. And, even if you're not owed a lump sum, it is still considered part of your total income.
You may also be able to collect punitive damages. These damages are awarded in addition to compensatory damages. While these are not taxable, they'll likely have to be reported to the IRS as other income. The other party may file an appeal, which can result in significant delays in the payment of your settlement. You can even receive interest on your money judgment if the other party appeals. In such a case, it is important to remember that the other party may seek to deduct the punitive damages as a result of an appeal.
If you receive a personal injury settlement, it is crucial to seek legal advice before accepting the settlement offer. A good attorney can explain the differences between the various types of damages and how much tax is associated with each. If you're unsure about how to structure your settlement, you could end up paying thousands of dollars in unnecessary tax bills. Fortunately, you can speak with a qualified Denver injury attorney who can help you determine what portion of your pain and suffering settlement is taxable.