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Featured / 12.12.2021

Personal Injury Claims: Do You Have to Pay Taxes on Them

In many cases, the answer to this question is yes. However, some personal injury claims are not taxable. To determine what you need to pay taxes on and what you don’t, it would be a good idea to contact Idaho Personal Injury Lawyers who specialize in these types of claims. This way, you can have someone fill out your income taxes accurately and avoid penalties down the road.

Let’s look at a few income tax issues as they apply to a personal injury claim.

Compensation for Physical Injury is Not Taxable

In general, if you receive compensation for a physical injury caused by someone else’s negligence or intentional wrongdoing, it is not taxable. However, there are some exceptions to this rule:

  • Damages paid due to a lawsuit may be taxed depending on the settlement agreement. For example, damages awarded for pain and suffering are not taxable, but damages awarded for lost wages or medical expenses may be taxed.
  • Punitive damages are taxable. Some exceptions apply in case of physical injury or sickness. For example, if the punitive damage award is to compensate a person for their injuries caused by reckless or willful behavior of another person.

Taxable Wages

If you receive compensation from your employer in exchange for time lost due to an injury, this may be taxable income. Also included are any temporary disability benefits paid by your employer.

Compensation for Emotional Distress May Be Taxable.

If your damages awarded in a suit are related to emotional distress, such as the injury or death, this might be taxable income. However, there are some exceptions if the award compensates you for physical injuries and illnesses caused by someone else’s negligence.

Tax Problems Related to Non-Taxable Income

Though you do not have to pay taxes on a personal injury settlement, it can still cause tax problems if you receive too much. For example:

  • Suppose the amount of your settlement is quite large and or there are multiple claims associated with that particular loss or incident. In that case, this may be considered “gross income” by the IRS even though it isn’t taxable. This means that you have to report it on your taxes and pay the usual income tax percentage.
  • If a settlement covers more than one year, then each installment payment can be considered taxable in that particular tax year.

Income Tax Withholding and Compensation for Personal Injury or Sickness

If you receive a settlement for personal injury or sickness, then it is possible that the person who pays you will have to withhold income tax from your compensation.

In some cases where a settlement agreement includes an award of future damages such as lost wages, this amount may also be subject to withholding by the third party in addition to any other amounts that may be withheld for taxes and other purposes.

If you receive compensation for a personal injury, then it is vital to speak with an experienced tax professional about what this means in terms of filing taxes at the end of the year. Also, find out whether or not your settlement payments are taxable. This way, you can avoid making any mistakes that will lead to penalties or fines from the IRS.

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