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Featured / 11.01.2023

Is a Lawsuit Settlement Taxable?

Settlement or Award is Not the End of Your Personal Injury Case

Personal injury cases have many aspects and stages, and dealing with the case doesn’t end when you get your settlement or jury award. There will still be a few loose ends to wrap up, and it is helpful to have an attorney help you with this part of the process as well. Part of this is paying taxes on your settlement if needed.

Richard Schwartz and Associates is an award-winning law firm helping people with every part of their personal injury cases. We have helped many people just like you, and we will stick with you through the very end of your personal injury case and settlement. Contact us today at (601) 988-8888 for a free consultation, or keep reading to learn about taxes and settlements.

Types of Compensation in Personal Injury Lawsuits

There are three primary types of compensation in personal injury lawsuits:

  • Compensatory damages
  • Punitive damages
  • Lost wages or income

Compensatory damages are money paid to compensate for injuries or illnesses such as medical bills. Compensatory damages also include pain and suffering. Punitive damages are meant to punish the defendant in cases of gross negligence. Lost wages or income are money paid to compensate for time off work during recovery. Each of these is treated differently by the IRS.

What Part of My Settlement is Tax-Free?

Compensatory damages for personal injury including for pain and suffering are not taxable. However, compensatory damages for property damage and other damages may be taxable as other income. 

There is an exception. If the compensatory damages are paid to cover medical expenses you previously deducted on a tax return, that portion of the damages is still taxable as other income. This is because you already received a deduction for those medical expenses.

What Part of My Settlement is Taxed?

Punitive damages are always taxed as other income. This is because punitive damages are not compensating for any type of expense that is normally tax deductible. Instead, this award must be claimed on your tax return as other income. Punitive damages are not typical in all personal injury cases.

Awards for lost wages are also taxed by the IRS. Any compensation for lost income while you were in recovery is treated as regular wages for tax purposes. This means that in addition to income tax, you must pay Social Security and Medicare taxes on that award.

When Do I Pay Taxes on My Settlement?

Any taxes that are due on your settlement are typically paid when you file your taxes. You will claim compensation for lost wages and wage income, and you will claim punitive damages and other non-compensatory damages as other income. These taxes must be paid by the April deadline.

In some cases, you may need to make advanced tax payments when you receive your settlement. The IRS requires estimated tax payments to be made when you will owe more than $1,000 after all deductions and credits for the year. This estimated tax payment should be made as soon as possible before spending the rest of the settlement.

Our Firm Stays With You to the End

Our firm doesn’t just get you a settlement, we help you determine what to do with that settlement, including how to pay taxes on the appropriate amounts. We can advise you or your tax professional on which income to claim and how to claim it on your taxes at the end of the year. This is an important aspect of your case because if you do not pay taxes appropriately they can be harder to pay later.

Our firm stays with you to the end. Contact us today for more information or to schedule your free consultation.

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