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Taxability of Personal Injury Settlements

It is important for people with Personal Injury and Wrongful Death claims, whether arising from a car accident or any other type of motor vehicle collision (truck, SUV, motorcycle, pedestrian) to know whether any settlement or recovery is taxable.

The Personal Injury and Wrongful Death attorneys at the Schmidt-Salita Law Team, formerly Schmidt-Salita Law Team want you know that generally Personal Injury and Wrongful Death settlements are tax-free.  Whether you must include the settlement proceeds in your income depends on all the facts and circumstances in your case.  In every case, however, they recommend that the final opinions client get the final opinion from a certified tax accountant.

There are many exceptions including the following:

  1. Personal physical injuries:

Generally, settlements for personal physical injuries or physical/emotional sickness are non-taxable.  However, if you have previously taken a deduction for medical expenses, you may be required to report that portion for which the prior deduction was taken. See IRS Publication 525.

  1. Emotional distress or mental anguish:

Proceeds that a person receives for psychological injury, emotional distress or mental anguish resulting from a personal physical injury or physical sickness are treated the same as proceeds received for personal physical injuries or physical sickness as discussed above.

  1. Lost wages or lost profits:

If you settle and no portion of the settlement is specifically designated as “lost wages or loss of earnings,” the entire settlement is generally not subject to income tax with the exceptions stated in this document.

If, however, a specific portion of the settlement is designated specifically to wage and earnings losses, that portion may be subject to taxation.

If your case goes to trial and the jury specifically allots a portion of the jury verdict specifically to lost wages or loss of earnings, then that portion may be subject to taxation.  Again, the final opinion in this regard should be left to your certified tax accountant.

It should be remembered that business income may be treated the same as lost wages or earnings.

  1. Settlements for Wrongful Death:

Settlements or jury verdicts received by the heirs of the person who died as the result of the fault of another person are also generally tax-free

  1. Loss-in-value of property:

Although not specifically a part of a Personal Injury claim, your attention is called to the issue of settlements for property losses. Settlements for property loss in the value of property that are less than the adjusted basis of your property are not taxable and generally do not need to be reported on your tax return. However, you must reduce your basis in the property by the amount of the settlement.  If the property settlement exceeds your adjusted basis in the property, the excess is income.

  1. Punitive Damages:

Punitive damages are taxable even if the punitive damages were received in a settlement for personal physical injuries or physical sickness.

For more detailed information, consult with your certified public tax accountant.  Do not rely on the advice of your Personal Injury lawyer, as tax law is not part of his or her field of expertise.  Always rely totally on the accountants’ advice.  Your attention is directed to IRS Publication 4345 (Rev. 12-2016) Catalog Number 38586D Department of the Treasury Internal Revenue Service www.irs.gov

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