When you successfully pursue a personal injury claim and receive a settlement, it is only fair that you retain the full amount to help rebuild your life and cover the damages you have suffered. After all, the purpose of compensation is to alleviate the financial burdens resulting from someone else’s negligence or intentional wrongdoing.
But as the saying goes, nothing is sure in life except death and taxes – so people often ask us if Uncle Sam will take a piece of their award. In general, the IRS considers compensation for physical injuries or illnesses as non-taxable. This means that if your settlement is solely for medical expenses, pain and suffering, or other physical injuries, it is likely to be tax-free.
Damages that are tax-exempt in a personal injury lawsuit include:
- Compensatory damages for physical injury. Compensation received for physical injuries, including lost income, medical expenses, pain and suffering, loss of consortium, and legal fees, is generally considered tax-exempt. These damages must result from a physical injury to qualify for the tax exemption.
- Emotional distress arising from physical injury. Damages awarded for emotional distress and mental anguish that stem from a physical injury are also typically tax-exempt. However, if these damages were previously deducted as medical expenses in prior years, they may be subject to taxation.
- Wrongful death lawsuit settlement. Wrongful death settlements are treated similarly to personal injury settlements in terms of taxation. Compensation received in a wrongful death lawsuit, including punitive damages, is usually tax-exempt under the IRS Section 104(c).
What part of a personal injury award can be taxed in Virginia?
Components that are taxable include:
- Punitive damages. Punitive damages awarded to punish the defendant for their negligence or misconduct are generally considered taxable income. However, punitive damages are relatively rare in personal injury cases.
- Emotional distress without physical injury. Damages received for emotional distress or mental anguish without a physical injury may be subject to taxation. The taxable amount is adjusted by deducting previously paid medical expenses related to emotional distress that were not previously deducted.
- Interest earned on settlement. Interest earned on a personal injury settlement can be taxable. Large settlement amounts can generate substantial interest income, so it’s advisable to seek guidance from a knowledgeable personal injury attorney to understand and mitigate any potential tax consequences.
- Previously deducted medical expenses. If you previously claimed accident-related medical expenses as deductions on your taxes, you may need to include the amount you receive for those expenses in your taxable income.
How a Richmond injury lawyer can help you keep more of your award
An experienced personal injury attorney can provide invaluable assistance when it comes to the tax implications of your settlement. Here’s how we can help:
- Assessing tax implications. We can review the details of your settlement and collaborate with tax professionals to determine the taxability of different components. We will ensure you understand the potential tax consequences and help you make informed decisions.
- Structuring the settlement. If appropriate, we can negotiate a structured settlement that takes into account the tax implications and helps optimize your financial position. We work with financial experts to design a settlement plan that aligns with your long-term goals.
- Providing guidance and representation. Throughout the settlement process, we provide guidance, answer your questions, and advocate for your best interests. We ensure that your settlement agreement reflects the necessary tax considerations and protect your rights throughout the negotiation and resolution phases.
At Phelan Petty, we understand the complexities of not only the justice system, but of the complicated financial processes as well. We can use our experience and extensive knowledge to ensure that you receive the compensation you deserve, and that you can keep as much of your earnings as you deserve. If you are seeking to file a personal injury lawsuit, and you want to discuss how it might work out financially, give us a call or use our contact page. We proudly serve clients in Richmond, and throughout Virginia.
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Michael Phelan is a Virginia trial attorney who practices with a special focus on traumatic brain injury (TBI) cases, pharmaceutical and medical device claims, product liability cases, and truck accidents. Michael’s peers have consistently recognized him for his excellence as a trial lawyer, and his clients have praised him for his commitment to deep research, his outstanding communication skills, and his sincerity and dedication.