How Much Tax Is Paid on Personal Injury Settlements?
Posted on Saturday, December 10th, 2022 at 11:27 am
Obtaining a personal injury case settlement or lawsuit award can be complex, and you could encounter more complications once tax season rolls around. Depending on the specifics of your compensation, you may be required to pay taxes on some of the funds that you receive. Let’s explore how much tax is paid on settlements and awards, as well as some of the factors that can influence this amount.
Personal Injury Settlements or Awards Generally Aren’t Taxable
First, it’s important to understand that not all settlements or awards are taxable. According to the Internal Revenue Service (IRS), compensation received as a result of personal physical injuries or physical sickness is generally not taxable. This means that if you received a settlement due to an injury or illness that you suffered, you likely wouldn’t have to pay any taxes on the funds you receive.
Are There Any Exceptions to This Rule?
While you likely won’t have to pay taxes on a settlement or award funds related to your injury, you may have to pay taxes for money included in your compensation for other things. For example, you may need to pay taxes on the following:
- Any accident-related medical expenses you deducted from the prior year’s income tax
- Punitive damages
- Settlements for certain wrongful death lawsuits (funds received may be considered to be part of the deceased person’s estate)
How Much Will I Pay if My Settlement or Award Is Taxable?
So, how much tax is paid on settlements or awards that are considered taxable? The amount of tax you’ll have to pay will depend on your income and the specific type of compensation you received. If you received any taxable compensation, that money should be reported on your tax return as “other income.” This means that it will be added to your total income for the year and taxed at your marginal tax rate.
For example, let’s say you received a punitive damages award of $50,000. This money is considered taxable income, so it will be treated as regular income and is subject to the same taxes your other income would be. If you’re in the 22 percent marginal tax bracket, you’ll owe $11,000 in taxes on that settlement (22 percent of $50,000). If you’re in the 32 percent marginal tax bracket, you’ll owe $16,000 in taxes (32 percent of $50,000).
Other Mitigating Factors
Some other factors can influence how much tax you’ll have to pay on settlements or awards. For example, if you received a settlement or award in a class action lawsuit, you’ll need to report the amount you received on your tax return. However, the IRS may allow you to deduct certain attorneys’ fees and court costs, which can reduce the amount of taxes you’ll owe.
With that said, you will need to meet certain requirements to qualify for this exclusion, such as proving that you suffered a “non-physical injury” as a result of the incident.
Your Circumstances Will Determine How Much Tax You’ll Pay (If Any)
The total amount of tax you’ll pay on a settlement or verdict will depend on the specific circumstances of your case. If you received compensation for personal physical injuries or physical sickness, you likely wouldn’t have to pay any taxes on the funds you receive. However, if you received a settlement or award that included money for emotional distress unrelated to your physical injuries or for wrongful death, you may be required to pay taxes on that compensation.
In any event, the potential for taxation on your eventual compensation should not deter you from taking legal action. Whether you intend to conclude your case with a settlement or a courtroom verdict in your favor, a personal injury attorney can fight to recover fair compensation for your injuries. This can make it easier to pay your bills and make a full recovery.
Reach Out Today for Your Confidential Case Evaluation
If you’ve been injured because of another party’s negligent or reckless behavior, you may be entitled to compensation. Our team of dedicated Birmingham personal injury lawyers here at Farris, Riley & Pitt, LLP are ready to help, and our case evaluations are always free and confidential. Call us today at (205) 324-1212 to get started.