After suffering from a personal injury such as a car accident, lifting injury, or back injury, an experienced attorney can help to collect compensation from the accident. Once compensation has been received, you will need to decipher whether you will be required to pay taxes on the settlement. If the answer is yes, you will need to take into consideration how you will handle those taxes once you are compensated.
The IRS claims that In most cases, personal injury settlements are not taxable. However this is contingent upon the way losses were reported in the past years.
Personal Injuries that are Not Taxed
It can be more complex when it comes to payments surrounding emotional and mental distress. You will not be taxed on payments that were made to you for distress that resulted from illness or injury. Payments could be taxed if mental/emotional distress is not the result from an injury. However, medical bills received could be deducted from your taxable payment if they were from your distress.
Another type of injury that is not taxable most of the time are settlements for physical injuries and illnesses. You will have to pay back government benefits received in the previous year if you took a medical deduction on your taxes. The benefits value should be reported under income.
Health Insurance Subsidies
When a personal injury settlement is received, it is important to notify you health insurance providers to make them aware of your change in circumstances. Because your income has changed, you may fall in a bracket that impacts the health insurance you qualify for. Having all the necessary information and notifying your provider, could prevent you from being blindsided in the event that your insurance is impacted as the result of your settlement.
Regardless of the reason for acquiring punitive damages, they are generally taxable. In many cases, you will need to make estimated payments. Punitive damages must be reported as other income. Also important to note is that all interest accrued on the
settlement is taxable and must be reported as interest income. Failure to accurately account for and pay interest could put you at risk of paying penalties.
Loss of Profits and Wages
Generally, settlements received for profit loss and wages are taxable. Throughout the year that you are receiving payments, you will be required to pay both medical expenses and Social Security taxes for the year. Of course you’d search for the best attorneys Folsom CA has to offer, and working with an estate lawyer can be helpful as they can ensure that all taxes are handled appropriately if your settlement is for either lost profits or wages.
An estate plan attorney can help to put a plan in place when you have received a personal injury settlement. They can also support you in protecting your interests and ensuring that you are paying taxes on your personal injury settlement correctly.
Thanks to our friends and contributors from Yee Law Group for their insight into paying taxes on a personal injury settlement.