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Do I Need to Report a Lawsuit Accident Settlement for Tax Purposes?

After months of negotiations and courtroom battles, you finally received a settlement. The money you need to cover medical expenses and lost wages is finally on the way. That is, after you settle your taxes with the IRS.

If you receive money from a settlement, you may have to report and pay taxes on that money. The IRS, the government agency that collects taxes, separates lawsuit settlements into two categories: taxable and nontaxable. Remember, the IRS classifies gross income as “all income from whatever source derived.” The only exception to this is personal and physical injury compensation.

As with all tax matters, this may be confusing, which is why you should continue to seek guidance from your South Florida personal injury attorney.

What’s Nontaxable from My Settlement?

There are a few things the IRS will not tax from your settlement, such as:

  • Physical injury awards
  • Car accident compensation
  • Medical expenses
  • Emotional distress settlements

However, there may be some exceptions to what is taxable. Nontaxable compensation is outlined in more detail below.

Physical Injury Awards

The IRS does not tax compensation received from personal injury lawsuits if these cases caused visible bodily harm. Do not include physical injury compensation in your tax form’s income section.

Car Accident Compensation

If you receive compensation to repair or replace any property damage, the IRS will not tax the funds. Car accidents typically require extensive repairs, and you may even need a rental car for a period. If the damage is severe enough, you may even have to buy a new one. The money you received is considered a reimbursement, not income.

Medical Expenses

Medical visits for emotional distress or physical injury are nontaxable. Like compensation received for a car accident, you most likely had to pay for medical expenses out of pocket. Again, the money you receive is considered a reimbursement, not income.

It’s important to note there is an exception. If you include the medical expenses related to your injury for a tax deduction on your prior year’s tax return, a portion of your award that went to reimburse these expenses may be taxable.

Emotional Distress

Settlements received for emotional distress are nontaxable if the accident directly caused emotional pain. For example, if you become depressed due to your injuries, the compensation received is not considered income.

What’s Taxable from My Settlement?

Fortunately, there are fewer taxable items. They include:

  • Punitive damages
  • Lost wages

While obtaining compensation for lost wages is relatively common in personal injury settlements, receiving punitive damage compensation is uncommon.

Punitive Damages

If you receive punitive damages as part of your settlement, you should report them as “Other Income.” Courts assess punitive damages as a way to punish the defendant for outrageous conduct and to deter others from engaging in this act. Since these damages are not to compensate for any loss, they are taxable.

Lost Wages

Lost wages are taxable because the compensation is meant to supplement the income you lost while recovering from your injuries. In addition to normal taxes, lost wages compensation is also subject to Social Security and Medicare taxes.

Contact a Skilled Personal Injury Attorney Today

When you’re in an accident, you deserve to receive the full amount of compensation needed to get you back on your feet. At Baker Legal Team, we work hard to hold negligent parties accountable for their actions. Your personal injury case deserves to be backed by a firm with experience, success, and a commitment to justice.

You’ll work directly with Board-Certified Attorney Robert Baker. He’ll be sure to answer all of your legal questions and keep you informed throughout the entire process.

Call (561) 320-0000 or complete an online contact form to schedule a free consultation.

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