Taxation of Personal Injury Settlements

Law Firm of Jeremy Rosenthal | Taxation of Personal Injury Settlements

Following the pain, agony and suffering of a serious injury accident, receipt of a negotiated settlement or favorable jury verdict can and usually does allow victims to breath a massive sigh of relief. The long-awaited attainment of financial resources and fair compensation for what they have experienced can often feel like absolute vindication in the face of past injustice. However, the elation of victory is frequently chased by questions concerning tax liability for the amount secured. Denver injury attorney Jeremy Rosenthal can assist successful claimants in determining what, if any portion of their personal injury settlement is taxable and how best to remain in full compliance with state and federal tax laws.

Once a claimant has prevailed in a personal injury matter, the ideal scenario envisioned might involve obtaining a check that represents the settled or awarded amount minus the contingency fee for the attorney and immediate resumption of as normal a life as possible. However, it may quickly occur to successful plaintiffs that there may be tax obligations that need to be sorted out before it is wise to count on spending the funds received. The good news for most injury victims is that broadly speaking, the majority of settlement or verdict proceeds will not be considered taxable by state or federal authorities. This is true whether the award was procured through negotiations with insurance carriers or via trial in a court of law.

Personal Injury Settlements and the IRS

The Internal Revenue Service specifically excludes from the victim’s gross income any type of damages or payment for physical injuries or physical harm caused by the event in question. Thus, a significant portion of typical compensation in a personal injury case that is meant to pay for things such as medical costs, pain, suffering, lost wages and attorney fees will not be taxed, provided they are directly traceable to the relevant injury or illness-causing scenario.

Possible Exceptions to Non-Taxation of Settlement Amounts

It is important for injured parties to note that there are some situations in which parts of the total compensation received may in fact be subject to taxation by state or federal authorities. If punitive damages are sought and won in an injury case, that amount will be specifically identified as separate from compensatory damages and thus easily delineated as taxable. Another potentially significant amount that would likely be subject to tax is that of the interest on the money judgment or settlement award itself. This can include interest that accumulated as a result of the other party’s decision to appeal the initial ruling which, if unsuccessful, often results in substantial delays in the plaintiff’s receipt of payment.

Tax Treatment of Other Injury Types

While it is true that payment received for mental distress and anguish that is directly caused by physical harm is generally designated as non-taxable, damages for emotional trauma that is not connected to a physical illness or injury are more than likely going to be taxable. Cases in which this rule would come into play might involve claims such as harassment, wrongful dismissal, racial or gender discrimination and the like. Certainly harmful in nature, the critical difference is that claims of this nature are not linked to any sort of physical injury or sickness and therefore are not exempt from being taxed.

Prohibition Against Double-Dipping

There are a number of other circumstances under which the decisions made by a plaintiff during the pendency of his or her claim may ultimately subject the final compensation amount to taxation. As an example, any claimant who has already taken advantage of a tax benefit related to the case at hand may not utilize tax rules later on to realize an additional benefit of the same type. While it is certainly permissible to deduct medical costs paid out of pocket following an accident event, once those expenses are reimbursed via settlement or verdict, the previous deduction must be repaid to the IRS. This guards against what is commonly referred to as “double dipping.”

Liabilities Beyond Taxation

Questions concerning taxation are often paramount in the minds of those who receive personal injury settlements or awards, but it is also important for such individuals to review their financial situation following such an outcome in order to determine whether any other outstanding liabilities exist. Lawsuit funding liens and those placed by health insurance carriers must be addressed and resolved from settlement proceeds before any monies should be used by the successful claimant. A skilled personal injury attorney will provide thorough guidance on these issues, but it is still incumbent upon clients to ensure that all important financial details are resolved along with the rest of the case. In especially complex matters, it may also be wise to enlist the aid of an accountant or other tax professional who can untangle a compensation award to determine exact liabilities and make certain that they are covered.

Comprehensive Guidance from Initial Claim to Final Settlement

Personal injury cases by nature involved extremely difficult circumstances capable of placing great personal stress on entire families. Negotiating the complicated realms of medical treatment, physical rehabilitation and protracted litigation are things no victim relishes, and adding tax issues to the mix can prove truly frustrating. Attorney Jeremy Rosenthal is proud to offer Colorado clients critical insights and experienced guidance at each stage of their case, from the preliminary factual investigation through to distribution of settlement proceeds.

Whether you were injured in a car accident, a slip and fall event, or some other form of actionable negligence on the part of another, the Law Firm of Jeremy Rosenthal is committed to providing the comprehensive communication and client service so critical to achieving successful outcomes. While we always strive to reach negotiated settlements early on in the claims process, we never balk at taking a contested matter through to trial. If you are interested in learning more about your legal options following an accident event and receiving the tireless advocacy we believe you deserve, contact us at 303.825.2223.

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