As April 15 has come and gone, taxpayers all around the country are daydreaming about how they will spend their tax refund money, and advertisers know it. Advertisements for big ticket items flood your mailbox and light up your smartphone all spring. Of course, the reality is that not everyone gets a big tax refund. Plenty of hardworking Americans end up with a tax refund that will only enable them to buy enough bubble gum to last through the Fourth of July, if they even get a refund at all.
It seems like you have to pay taxes on everything, not just your salary from your job. What happens if a portion of your much-needed income comes not from wages or a salary but from a settlement from a personal injury lawsuit? Before you can even ask that question to your tax accountant, perhaps you should consult a car accident injury lawyer about how to go about being awarded this settlement money.
Personal Injury Settlements Should be Tax-Free
The IRS regards almost all money that comes into your possession as taxable income, regardless of its source. Therefore, the amount of money you appear to be getting will almost always be smaller in your bank account than it appears on paper. This includes everything from inheritance money to interest on savings to lottery winnings. Most money awarded to plaintiffs in civil lawsuits counts as taxable income, especially if the lawsuit is related to a business dispute or a dispute over property.
Personal injury lawsuit settlements are an exception, however, at least in theory. The IRS will refrain from imposing taxes on a lawsuit settlement if the damages were awarded for “observable bodily harm.” Therefore, a person who was awarded damages in a personal injury lawsuit related to a spinal cord injury suffered in a car accident will probably not have to pay taxes on the money. However, consult with your Certified Public Accountant, tax advisor/preparer and/or tax attorney to make sure you properly report your income.
Which Parts of Your Lawsuit Settlement are Taxable?
Many personal injury settlements contain both economic and non-economic damages. The economic damages are for past and future medical expenses and for past and future lost income. The non-economic damages are for less quantifiable hardships, such as physical pain and suffering and emotional distress; the formula used to calculate these is called the general damages multiplier. Damages awarded for medical expenses are almost certainly safe from the IRS. With the other elements of your settlement, you might need to have a longer conversation with your personal injury lawyer and/or your tax advisor/preparer.
Even if you have to pay taxes on part of your personal injury settlement, it is still better than trying to make ends meet when you are unable to work because of a serious injury. Contact the Law Office of Patrick H. Yancey in Houma, Louisiana to discuss your case.