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Is my personal injury settlement award taxable?

You may be wondering if your personal injury settlement is subject to taxation. As a general rule, compensatory damages awarded for personal physical injury or physical illness are not taxable by federal (the IRS) or state governments. The exemption is only valid if your claim stems from a physical injury or illness, such as the development of mesothelioma from asbestos exposure or injuries sustained from slip and falls or car accidents. You should be aware, however, there are exceptions to the rule.

In any personal injury case, the victim must prove negligence and causation of injuries due to the defendant’s negligent actions. Once both components are proven, settlements may be determined. Generally, plaintiffs will receive compensatory damages- a monetary award for actual injuries and losses designed to make the injured whole or return them to a financial state similar to their situation prior to the accident.

Compensatory damages are awarded for:

  • Tangible economic losses with costs that are easily determined, including medical treatment, loss of past and future income due to injury, loss of property, and costs associated with legal processes.
  • Intangible non-economic losses that are often difficult to quantify, including pain and suffering and emotional distress. Measuring ongoing pain, anxiety, fear, or diminished enjoyment and translating these into a financial sum are inescapably subjective and require experienced judgment.

The exceptions: Do I need to claim my settlement as income?

There may be instances when personal injury damages awarded to you must be claimed as additional income. Taxable personal injury settlements include:

  • Breach of contract damages: When failure to adhere to contractual obligations is the basis of your lawsuit, awards are taxable. This includes a breach of contract resulting in personal injury.
  • Punitive damages: Punitive damages are meant to punish the defendant in cases where a blatant disregard for others’ well-being is established and awarded in addition to compensatory damages.
  • Interest on judgment: California calculates additional plaintiff compensation in the form of interest based on the amount of time elapsing from the date the lawsuit is filed to the date the injured party receives payment from the defendant. The interest, not the initial settlement demanded, is added income.
  • Financial gains from employment-related lawsuits unrelated to physical well-being: Such lawsuits often involve a violation of employment law, such as unlawful discrimination and wrongful termination.
  • Claims for emotional injury not stemming from physical injury or illness.
  • Awards for property loss or damage in excess of adjusted property value.

How do I protect my personal injury settlement from the IRS?

The best way to ensure the highest proportion of your settlement remains in your bank account and out of the government coffers is to hire a personal injury lawyer. The IRS reserves the right to audit your claim at any time. An experienced personal injury attorney will know how to categorize damages appropriate for your case type, safeguarding your award under government scrutiny. Personal injury suits can be complicated enough without the added complexity of taxation law. If you’ve suffered a personal injury and would like to be made whole, call Crane Flores, LLP anytime, day or night, at (805) 628-4967.