When an injured victim receives a settlement award from a personal injury claim, that compensation is typically not taxable by the federal or state government. However, for this award to qualify as non-taxable, the damages must stem from a physical injury or illness.
The Knoxville personal injury attorneys at Greg Coleman Law explain what portions of a settlement may be taxed and important exceptions you should know about.
If you have been injured in an accident caused by someone else's negligence, we encourage you to take advantage of our free, no-obligation consultation today. During this free review, we can discuss your accident and whether you may have a valid personal injury case.
What Part of Your Compensation Award Is Nontaxable?
Any compensation awarded for damages caused by a physical injury or illness is non-taxable by either federal or state government. This is true whether you negotiated a settlement without having to go to court or you received a verdict as the result of a trial.
Examples of non-taxable compensation include:
- Medical expenses, such as in-patient hospital stays, surgical interventions and physical therapy
- Loss of consortium
- Emotional distress resulting from the chronic pain that was caused by your physical injury
- Attorney fees
What Are Exceptions to This IRS Rule?
There are exceptions that apply to compensation awarded in a personal injury settlement, meaning you could be taxed on certain portions of your settlement. The IRS has rules defining what portion of your personal injury settlement is taxable, including:
The government does not care who provides your wages. Whether it is your employer paying you or the lost wages are recovered via settlement for the time you were unable to work, this income is considered taxable and you must report it on your tax return. Be advised that the federal government will likely already have information about your settlement, because insurance providers have to submit a 1099 form to the IRS about the compensation you received.
Since it may take months or even years to settle a personal injury claim, settlements often include interest awarded to the victim. Any interest paid to you on your settlement is also taxable and must be reported as income.
Some personal injury lawsuits do not involve physical injuries or illnesses, such as wrongful termination, workplace discrimination and defamation lawsuits. In these cases, compensation may be awarded purely for the emotional distress or mental anguish that may result from this type of traumatic event. Since it does not, in this scenario, stem from a physical injury or illness, the resulting compensation is taxable.
Rarely awarded, these damages are intended as a punishment to the at fault party to discourage future similar behavior. Punitive damages are always taxable, and it does not matter whether the case involved a physical injury or illness.
2017 Law That Redefines How Settlement Damages Are Classified
In 2017, a new tax law went into effect to redefine how personal injury damages are classified. This law has caused considerable confusion for claimants trying to understand which portion of a personal injury settlement they need to report to the IRS.
Compensation resulting from a settlement or verdict is nontaxable only when the damages are caused by physical injuries or illness. This means that the government taxes you on any compensation for emotional distress, even if it later leads to a physical side effect.
Call Our Experienced Lawyers Today
If you suffered injuries because of someone else’s negligence, it is a good idea to seek legal advice. At Greg Coleman Law, our experienced attorneys are prepared to pursue justice and negotiate a fair settlement for our clients.
Request a legal consultation with a trusted attorney from our firm today. In this no-obligation and completely free claim review, we can answer your questions about what to expect from a personal injury claim and discuss your legal options. We accept personal injury claims on contingency, so, there are no upfront costs for our services. If we take your case, payment is only owed if we recover compensation on your behalf.
Contact our firm by phone 24/7: (865) 247-0080