Receiving money in a personal injury settlement or judgment may have tax consequences. In fact, depending on the type of settlement or judgement, you could have multiple tax payment structures tied to the types of damages you recover. For example, if your settlement has elements of back pay, emotional distress, and attorney’s fees, the IRS may request different actions to be taken on your behalf come tax day. Learn more about the taxability of personal injury settlements.
We’ve listed two of the most common types of settlements that stem from personal injury, and their payment structures below:
Personal Injury or Illness Taxability
According to the Internal Revenue Service, if you have been awarded money for personal injury of illness, and “did not take an itemized deduction for medical expenses related to the injury or sickness in prior years,” then the full amount of your settlement is non-taxable, and you don’t need to list it as income.
If, however, you did take a tax credit in prior years to help pay for an injury related to your settlement, then you’ll be required to report part of your settlement as income to pay for your past support. Any part of the proceeds for medical expenses must be allocated on a pro rata basis.
Emotional Distress or Mental Anguish Taxability
Similar to personal injury, any amount that you receive as a settlement for emotional distress or mental anguish doesn’t need to be reported as income as long as you hadn’t taken tax credits in prior years to help pay for expenses like counseling, and it stemmed from a physical injury.
If the proceeds you receive for emotional distress or mental anguish do not originate from a physical injury sustained as part of your settlement, you will be required to report the earnings as income. Per the IRS, the amount you’ll need to pay is reduced by “(1) amounts paid for medical expenses attributable to emotional distress or mental anguish not previously deducted and (2) previously deducted medical expenses for such distress and anguish that did not provide a tax benefit.”
Contact Gokal Law
Have you recently been injured and would like to be paid a settlement to compensate for your medical bills? You may be entitled to a case. Contact Alison Gokal of Gokal Law Group, Inc. Our team will diligently investigate your claims, interview witnesses, and give you the support you need to win your case. The sooner you contact us, the more effective we are at getting you the justice you deserve.
Gokal Law Group is a family firm that treats our clients as if they were our own flesh and blood. We fight for our clients as we would our own children, sisters, brothers, and parents. We are our clients’ Warriors, fighting to bring them justice and right the wrongs they have endured.
Each attorney has a specific practice area for which they are tried, tested, and battle-ready. Each has vast years of experience in their practice area, providing them the knowledge, skills, and vision to fight and win. Learn more about Gokal Law Group.