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Personal injury lawyers are always asked by their clients if they (the clients) have to pay taxes on the personal injury claims that they file. They tell their clients that personal injury claims are generally not taxed except for in a few specific circumstances.
It’s obvious that you will do two things immediately after having been involved in a personal injury accident. You’ll hire a personal injury lawyer and you’ll ask him or her to help you file a personal injury claim or case against the defendant.
You’ll be seeking to be reimbursed and compensated for a variety of things including medical bills and expenses, related expenses and bills, pain and anguish, mental and emotional trauma, lost wages and income, as personal injury law considers all of these ‘things’ to be damages. You may even be suing the defendant for punitive damages if you can prove that he or she was acting recklessly.You may even obtain a judgment if you sue the defendant in court. This will make your final settlement even bigger. The defendant will have to pay interest on the judgment portion of the settlement for every day that he or she is delinquent on payments.
Because personal injury settlements involve many financial components that may differ substantially, your personal injury lawyer will tell you that only some components of your settlement can be taxed. It is best to discuss these details with your accountant or even the lawyer as they understand how all of this will work for you.
Taxable components of a settlement
You’ll generally pay taxes on the following:
Lost wages/income – you’ll be paying state, federal, and other types of applicable taxes on this component. The amount that will be taxed is equivalent to the amount that would normally be deducted from your paycheck.
Mental anguish and emotional pain – this includes PTSD. You’ll be paying state, federal, and other types of applicable taxes only if your mental anguish and emotional pain are not caused by personal injuries.
Punitive damages – since this award is solely meant to punish the defendant for his or her reckless/careless actions, they are taxed. You are not legally designed to receive any benefit from these damages.
Interest – your settlement will accrue interest income if it drags on and ends up being settled in court. The interest income will accrue until at least the judgment portion of the settlement is paid in full.
The tax situation for personal injury settlements is complex. You need to hire a personal injury lawyer in North Bay to help you navigate through the complex maze of taxation that receiving a personal injury settlement can present you with.