If you are injured in an accident caused by another party, you may be entitled to compensation for your injuries and losses. You may be reimbursed for your medical expenses and loss of income, as well as compensate for your physical and emotional pain and suffering. A California personal injury attorney can help you file a claim with the insurance company for the at-fault party. Before settling your claim, discuss with your attorney whether any of the proceeds are taxable as income.
Will I Owe Taxes On My Personal Injury Settlement?
In general, personal injury settlements are exempt from federal and state income taxes. However, there are exceptions.
A personal injury settlement includes compensation for a variety of damages. The types of damages determine whether you may owe income taxes on the personal injury settlement. Whenever possible, your personal injury lawyer can try to structure the settlement to reduce your tax liability. However, some factors are not within the control of you or your attorney.
Medical Bills and Personal Care Costs
The compensation you receive for your medical care and personal care is typically not taxable as income. However, if you claim your medical bills on your income tax returns as a tax deduction, you could incur a tax liability for that portion of your settlement that covers the medical costs claimed on your tax return.
Loss of Income
Compensation for the loss of income could be subject to tax in certain situations. If a physical injury caused the loss of income, you might not owe income taxes on compensation for lost wages. However, if the loss of income was based solely on emotional or mental injuries, you may be required to pay income taxes on that portion of your personal injury settlement. It is always best to consult a tax professional and discuss compensation for loss of income with an attorney before accepting a personal injury settlement.
The amount of your personal injury settlement that compensates you for the loss of property or damage to property is generally not taxable unless you receive an amount that is higher than the adjusted basis for the property.
Pain and Suffering Damages
Pain and suffering damages compensate you for the physical, mental, and emotional damages caused by the accident and your injuries. In most cases, compensation for physical pain and suffering is not subject to taxation. Likewise, compensation for emotional distress and mental anguish that is related to or caused by the physical injuries sustained in the accident is also not taxable. However, claims that do not include physical injuries could be subject to taxes for compensation of mental and emotional damages.
Punitive Damages and Interest
Punitive damages are intended to “punish” a party for gross negligence and willful, wanton wrongdoing. These damages are not compensatory in nature; therefore, they are generally subject to taxes. Also, if you receive interest on a personal injury settlement, that interest is typically subject to income taxes.
Contact a California Personal Injury Attorney for More Information
Personal injury settlements can be very complicated. They may involve several types of compensation. The way a settlement is drafted can have a significant impact on whether the proceeds are subject to tax. Always consult a California personal injury attorney before accepting a settlement offer to ensure the offer is fair and in your best interest. Contact us today.