Personal injury cases will often settle before trial. Once settlement occurs and the case, you will usually receive settlement proceeds within a short time after paying expenses and attorney's fees. A common question that we hear from most of our clients is, “Will I have to pax taxes on my settlement?”
The answer to that question, is the same answer that is given to most legal questions, which is, “it depends.” Generally, money received from settlement of most personal injury cases, whether the case settles before trial or from a jury award, are not taxable under federal or state law.
Whether a personal injury settlement is taxable often depends on whether a person suffered physical injury or physical sickness. Settlements received as a result of physical injury or physical sickness are non taxable. A settlement for mental anguish or emotional distress are usually nontaxable.
However, there are some exceptions to this rule. Punitive damages, which are damages a Court will award to a person as punishment for a defendant's awful behavior, are generally taxable. A settlement award received for compensation of lost wages or loss of income is also taxable.
Other examples of non physical injuries that are taxable are claims for wrongful termination, discrimination, harassment, defamation, and breach of contract. However, if the breach of contract resulted in physical injury then there would be the possibility of a nontaxable settlement.
There are many complex legal issues that can arise during settlement negotiations, including tax related issues. It is important to consult with an experienced personal injury attorney before accepting any personal injury settlements. It is also important to consult with a licensed CPA to assess your tax liability. Best practices are to disclose any personal injury settlement or proceeds to your accountant.
If you believe you may be entitled to a settlement that was caused by an injury, it is important that you take steps to ensure that your rights are protected. Please give us a call for a free consultation to discuss your rights, and possible claim.
This information is provided for informational purposes only and not for the purpose of providing legal advice.