Are pain and suffering awards taxable? It depends on the circumstances. A personal injury lawsuit may be taxable for pain and suffering awards, but not for lost wages. In such a case, the compensation may be non-pecuniary (i.e., non-cash). However, a person receiving compensation for pain and suffering may be entitled to lost wages in the future, which can also be taxed.
The Canadian Revenue Agency doesn't consider pain and suffering awards taxable income, so the compensation for non-pecuniary losses, such as medical bills and medications, isn't. Likewise, the interest generated by an award isn't taxable. The reason for this rule is that pain and suffering awards are supposed to reimburse the plaintiff for his losses. Otherwise, they aren't taxable. However, some jurisdictions don't allow pain and suffering awards to be taxed.
In Massachusetts, however, pain and suffering is not taxable if it is directly related to the injury. A motorcycle accident victim may be in extreme pain for months after an accident. In addition to the pain and suffering resulting from the accident, he or she may experience mental anguish or emotional distress as a result of the injuries sustained in the accident. In these cases, emotional distress may be taxable because the Internal Revenue Code recognizes emotional distress as a form of illness or injury.
Although pain and suffering awards are taxable, the amount of money allocated to such costs is not taxed. Moreover, medical bills are deductible only if they're claimed as deductions on your tax return. Therefore, if you receive compensation for your pain and suffering, make sure you keep track of your expenses so that you can deduct them. This is also true for any damages awarded for emotional distress. The amount of compensation awarded to you for pain and suffering must be clearly deducted as a separate expense.
In addition to physical pain and suffering, you may also receive damages for emotional distress. However, these payments are nontaxable if you don't itemize your medical expenses. If the emotional distress is unrelated to the physical injury, the payments may be tax-deductible. Therefore, it's important to make sure you've checked whether these compensations are taxable or non-taxable. If not, they're worth seeking.
Car accident settlements that include pain and suffering awards are not taxable in Michigan. These payments are given to the injured party as compensation for pain and suffering, as well as for most of their lost wages. However, payments for No-Fault attendant care services are taxable. It all depends on the nature of the claim and who is receiving the payment. While car insurance settlements are generally taxable, pain and suffering awards are not.