At the conclusion of a successful personal injury suit, the injured person collects money damages and pays the fees for an Arlington Heights, IL personal injury lawyer accrued during a case. But after that, you may need to consider the tax consequences of the judgment or settlement. According to our friends at Therman Law Offices, LTD, pepending on the types of damages received and on the type of case, you may have to pay taxes on all or part of the damages you receive in a personal injury case.
Generally, personal injury damages are not taxable if they are related to a physical injury or physical illness. This rule applies regardless of whether the damages are received as a judgment after the completion of a trial, a settlement payment without filing suit at all, or anything in between. With some exceptions, they are not included in gross income for tax purposes. However, if the injured person deducted medical expenses on a past tax return, then he or she must pay taxes on that amount that is recovered in a personal injury suit.
The law requires that, for the rule exempting damages from income to apply, a physical injury or illness is required. For example, a case in which the victim suffered a broken arm from a car accident, or an illness resulting from medical malpractice, would qualify.
There are several exceptions to this rule. One exception is for damages awarded to compensate the victim for lost wages. Wages would normally be included on a W-2 form and be included in taxable income. Because compensation for lost wages is income, it is taxable.
Punitive damages are damages awarded to punish the wrongdoer, rather than to compensate the victim for losses. Awards of punitive damages go above what is required to compensate the injured person for his or her losses. They are generally taxable, whether or not there is an accompanying physical injury.
No Physical Harm
If the case involved no physical harm, such as in a defamation case that damages the victim’s reputation, the damage award will usually be taxable. For example, Joe makes death threats to John, who is so frightened that it causes severe anxiety and stress, and he has to see a psychiatrist. If John then sues Joe for intentional infliction of emotional distress, he will have to pay tax on his recovery. But if the emotional distress is accompanied by a physical harm, then damages are not taxable. For example, if John’s stress causes severe headaches and ulcers, then the damages may not be taxable.
Most – if not all – state laws allow an injured person to collect interest on a personal injury judgment or settlement. The court may order that interest be paid on the damages dating from the date the suit was filed. Interest payments are generally taxable.
Contact a Personal Injury Law Firm Today
If you have been injured in an accident caused by another party or parties, you may be entitled to financial compensation. To learn more, call an experienced personal injury attorney.