It used to be that when a person won a settlement or a judgment in court during a personal injury case, there were very few taxes imposed on the amount of compensation the plaintiff received. Now however, with a new tax law imposed by President Trump, that is no longer the case.
The new law, which came into effect at the beginning of 2018, states that only physical injuries are tax free. Things like emotional distress are now taxable. And it gets even more confusing. The IRS has now determined that injuries such as insomnia, headaches, and stomachaches are not considered physical injuries, as these could be a result of emotional distress.
So what injuries are actually considered physical, and which are not? It is something that lawyers and plaintiffs are still trying to figure out. The physical effects of stress on the body have been well documented. And just as emotional distress can cause physical injuries, those same physical injuries can also cause emotional distress.
Under the new tax law, when a plaintiff is awarded compensation or a settlement, those funds are deemed to be 100 percent awarded to the plaintiff. When they have been working with a contingency lawyer, a portion of that money will go towards the lawyer. Yet, plaintiffs will still be taxed for the entire amount.
So for example, if a plaintiff was awarded $100,000 in an injury case, but had to pay the lawyer 40 percent of it, they would be taxed on the full $100,000, even though they only received $60,000 of it.
“The new tax law simply does not make sense,” says Lyle Warshauer of Warshauer Law Group. “Why are people being taxed on money they never received and what variables were weighed in determining how settlements are taxed for physical injuries versus emotional injuries? It merely takes advantage of personal injury victims and creates a precedent that insinuates that justice is a luxury, not a necessity.”
There are some exceptions to the new rule. For example, if the lawsuit pertains to the plaintiff’s business, those legal fees can be deducted as a business expense. When the lawsuit is being filed against an employer, or if it is a certain type of whistleblower lawsuit, those may also have certain deductions attached to them.
The new tax laws are going to hurt anyone filing a lawsuit in the future. To ensure it causes the least amount of financial pain, it is advisable that anyone wishing to file a personal injury claim speak to a tax professional before a settlement is decided on or a judgment is given in court.