10 Jun 2014

You’ve Obtained a Personal Injury Settlement or Award of Damages. Do You Have to Pay Taxes on That Money?

When we obtain a settlement or a judgment on behalf of one of our personal injury clients, we often get asked if those proceeds are taxable. Like most money we receive throughout our lives, amounts received at the conclusion of an Arkansas personal injury case may have tax implications.
Under federal law, plaintiffs who receive money damages arising out of either personal injury lawsuits or settlements do not have to pay taxes on damages compensating them for physical injuries. Specifically, 26 USC § 104 does not impose a tax on damages related to physical pain and suffering. The rules are entirely different, however, when it comes to economic damages and items unrelated to physical damages. While you should always consult with a tax professional with any questions about your specific situation, the following is a very general overview of how taxes apply to various personal injury damages

Awards and Damages for Medical Costs

Because medical damages are awarded to reimburse an injury victim for out-of-pocket expenses he or she has already incurred, they are typically not subject to tax.

Awards and Damages for Property Damage

Similar to medical costs, property damage awards reimburse a personal injury plaintiff for out-of-pocket costs to repair damaged property, such as a vehicle, home, or bicycle – with the majority of accident cases involving vehicles. Proving that tax rules can make sense on occasion, these items are not subject to tax as it would be unfair as a matter of for personal injury plaintiffs to be forced to pay personal income tax on reimbursed costs.

Compensation for Lost Wages

When you receive compensation for lost wages, that amount is subject to tax just as your wages would have been had you not lost them due to your injury. Because personal income is subject to federal tax, compensation for lost wages is also taxable.

Punitive Damages

Punitive damages are designed to deter defendants and others from engaging in similar negligent behavior in the future. They are supposed to punish and prevent. Like lost wages, punitive damages are also subject to tax.
As noted, you should always seek the advice of a tax professional when preparing your taxes. But if you need an Arkansas personal injury attorney who can help you obtain compensation for your losses, the personal injury attorneys at Kendall Law Firm, PLLC have more than 60 years of combined experience helping their clients obtain compensation for injuries caused by the carelessness of others. Call us today at (479) 464-9828 to discuss your case.
This website has been prepared by Kendall Law Firm, PLLC for informational purposes only and does not, and is not intended to, constitute legal advice. The information is not provided in the course of an attorney-client relationship and is not intended to substitute for legal advice from an attorney licensed in your jurisdiction.

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