If you have received money as part of a legal settlement or lawsuit, you may be subject to paying taxes on that money. Different laws apply to different types of settlements and the nature of your payment will determine whether your settlement is taxable or not. If you have any questions regarding the taxability of your settlement, make sure to ask your lawyer about the laws regarding your case.
Emotional Pain and Suffering Damages
Whether or not tax will be due for monetary awards for emotional damages will depend on the particular case. While emotional distress isn’t considered a physical sickness or injury, damages received for emotional pain and suffering due to physical sickness or injury are generally tax-free. As an example, the compensation you may receive for the pain and suffering caused by the physical injuries you’ve received in a truck accident will be tax-free.
Conversely, compensation that’s received for emotional distress that has not been caused by a sickness or injury is generally considered taxable income. If you file a claim for discrimination in the workplace, for example, the portion of the proceeds awarded for emotional pain and suffering would be taxable. There are some exceptions when the emotional distress causes you to seek medical care, however. In those instances, the damages awarded for emotional pain and suffering would be tax-free, up to the amount that covers your medical bills.
Personal Injury Compensation
If someone has caused you a personal injury or sickness, that money is generally considered non-taxable. The damages are meant to compensate you for lost wages, medical expenses, pain and suffering, and emotional distress and are not considered income. This extends to damages awarded that are compensatory in nature for wrongful death cases. In those cases, it was a personal injury or sickness that was caused by another person that led to the decedent’s death.
Punitive damages that are awarded from a personal injury lawsuit are taxable. These taxes are not compensatory in nature and are meant to serve as a punishment to the responsible party. This also includes punitive damages awarded in wrongful death claims. Laws vary from state to state, however, and in some cases, punitive damages are not taxable in the case of wrongful death.
If you have questions regarding the tax implications of your wrongful death settlement, be sure to contact your lawyer to see how state laws apply to your case. Knowledgeable Charlottesville, VA injury lawyers will be able to guide you through the confusing area of tax laws regarding your settlement.
Thanks to MartinWren, P.C. for their insight into personal injury claims and taxes for settlements.