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Understanding Personal Injury Settlements: Are They Taxable?

A settlement happens during a legal case when the parties can reach an agreement outside a court’s intervention. This usually comes with a final settlement agreement, which is a document stating that parties waive their rights to pursue any legal action, as well as monetary recovery from the case in question. Settlements are usually encouraged by courts, especially since this helps ease the trial traffic courthouses see day-to-day. So long as both parties come up with a mutually beneficial solution, the case will be regarded as dismissed.

Most settlements occur for personal injury cases, but many remain in the dark about tax implications. Simply put, personal injury settlements can be taxable, partially taxable, and nontaxable, all of which depend on the case, compensation, and extent of injuries. 

To help you know where your settlement stands here’s a quick and easy guide to follow. Let’s begin:

When are personal injury settlements taxable?

Personal injury settlements may be non-taxable if you did not take an itemized deduction for medical expenses related to your injury or illness. Because the full amount of these settlements are non-taxable, you are not required to include these settlements when you declare your income.

There are some elements of a settlement that warrant taxes, such as punitive damages, emotional distress damages, pain and suffering, and lost wages. Although physical sickness damages aren’t taxable, emotional distress damages are. Moreover, if you receive proceeds for lost wages, those are subject to taxes because wages themselves are taxable. If you receive compensation for medical expenses and those were used for a tax deduction on the tax returns for the prior year, then that compensation is taxable. 

What should you do if your settlement falls under the taxable bracket?

If you or a loved one suffers from an injury following an accident but has already received financial compensation for what has transpired, expect to face some degree of taxes. It’s important to note that the dispute and settlement is a complex process, one that necessitates multiple legal issues. In other words, you’re required to pay taxes on specific items, but others will fall into an exemption category.

Medical expenses are always tax-free, for instance, but distinctions between physical and emotional can be sometimes difficult to fathom. Thankfully, the litigation process allows draws to be lined carefully, which specifies which part of your claim can be taxed. 

In Summary 

From everything gathered, we can safely deduce that most personal injury settlement cases are non-taxable. This is based on either existing state or federal law, but be ready to pay for other items that may be deemed taxable through the litigation process. The settlement in question is regardless of the case’s circumstances, such as before or after pursuing a personal injury lawsuit. 

Neither the state or federal government can tax most of your injury claim, especially since they’re meant to compensate for your loss in various aspects of your life—costly medical expenses, lost wages, pain and suffering, and even a life alteration as a result of your injuries. 

If you wish to learn more about personal injury settlements, allow New York’s Ronemus & Vilensky law firm to help. We offer you the best accident lawyer to handle your case, be it a personal injury, medical malpractice, wrongful arrest, and so forth. We’ll help bring your justice—book a consultation today.