Receiving a settlement check for an injury claim provides the victim financial stability and peace of mind. With the IRS collecting taxes on everything, it is common for accidents victims to ask, "Do I have to pay tax on a personal injury settlement in Virginia?"
As a general rule, personal injury compensation is tax-exempt. But before accepting any settlement offer, the plaintiffs must understand the settlement structure and save themselves from any tax liability. At Kalfus & Nachman, our knowledgable and experienced personal injury attorneys understand how to get you the tax-free compensation you deserve.
In this article, our competent attorneys will help you learn about your injury settlement's taxation and how it can affect your earnings.
IRS on Personal Injury Settlement's Taxability
The Internal Revenue Service (IRS) is the first place to go if you have any tax-related questions. IRS publication 4345 provides you information about whether you have to pay tax on a personal injury settlement and include the settlement or verdict proceeds in your income. According to IRS, personal injury settlements get excluded from your gross income, except under specific circumstances. The most critical of these conditions is that the damages must be caused by physical injuries due to the accident. The compensation for physical injuries recovered in a personal injury lawsuit is not taxable under federal law or Virginia state law because the purpose of a personal injury settlement is to compensate victims for expenses and loss of income due to the injury that occurred in the accident.
Damages in a Personal Injury Settlement that are Tax Exempt
The plaintiff may recover compensation for physical injury, non-physical injury, and punitive damages stemming from the defendant's wrongful conduct. However, depending on the type of damages awarded, the plaintiff may have to pay taxes or get a tax exemption. Discussed below are the compensatory damages in a Personal Injury Settlement that are tax-exempt:
- Compensatory Damages for Physical Injury - Compensatory damages received for your physical injury are not considered taxable by the IRS or State law. It implies that typical personal injury damages like lost income, medical costs, emotional distress, pain and suffering, loss of consortium, and legal fees are not taxed as long as they result from a physical injury.
- Emotional Distress Arising from Physical Injury - Damages received for Emotional distress and mental anguish arising from physical injury are excluded from taxation when they are not used as an itemized deduction for medical expenditures linked to the injury in previous years.
- Wrongful Death Lawsuit Settlement - When it comes to income taxes, wrongful death settlements are regarded the same as personal injury settlements. According to the IRC Section 104(c), the IRS does not tax wrongful death case compensation. Punitive damages in wrongful death claims are also tax Exempt.
Personal Injury Settlement Components that are Taxable
Unfortunately, not all damage rewards in personal injury claims are exempt from the taxes. In some cases, these damages or the settlement sum might be included in your gross income and can be taxed.
- Punitive Damages - Punitive damages in a personal injury claim are awarded to punish the defendant for negligence or wrongdoing. It usually takes the form of payment to the plaintiff. These payouts are generally considered a part of your annual income and are always taxable, but they are also relatively rare in any personal injury case.
- Emotional Distress without Physical Injury - You must include the proceeds you receive for emotional distress or mental anguish in your income if they do not stem from a physical injury. Such damages are taxable; however, the amount included is adjusted by (1) amounts paid for medical expenditures related to emotional distress or mental anguish that were not previously deducted and (2) previously deducted medical costs for such distress and anguish that didn't yield a tax benefit.
- Interest Earned on Settlement - In some cases, the IRS can tax dividends or interest earned on a personal injury settlement. Large lump-sum settlement amounts generate a great deal of income in the form of interest, and it is best to contact a competent personal injury lawyer to help you mitigate tax consequences.
- Previously Deducted Medical Expenses - If you claimed accident-related medical expenditures as deductions on your taxes in previous years, you must pay taxes on those deductions after you get your settlement.
Virginia Personal Injury Attorneys to help you Minimize Tax Consequences
The IRS makes every effort to deliver accurate information to taxpayers when it comes to taxation. Unfortunately, navigating this information may be difficult, making mistakes like underpayment of taxes all too typical. Always see an expert personal injury attorney if you have been injured in an accident.
Working with an experienced attorney can help you minimize your tax obligation and ensure all tax situations are handled correctly. Kalfus & Nachman's seasoned personal injury lawyers have decades of expertise and can assist you in meeting all of your federal and state tax obligations without burning your personal injury settlement. Call us for a free consultation today: 855-880-8163