Are Settlements Taxed By The Government?
If you have recently been injured in an accident, and you are pursuing a personal injury settlement as a result, you may be wondering about the taxes attached to the compensation if you win your case. Are personal injury settlements considered taxable income? Will your injury end up costing you more money when it comes time to pay your annual taxes? While the answer is usually, and fortunately, no, personal injury settlement taxation is a little more complicated. Learn more by reading the guide below on how your settlement might be taxed in the state of Florida.
What Is Tax Free?
While much of your compensation will vary on a case-by-case basis, there are a few forms of recovery which you can expect to be exempt from taxes. These include:
- Compensation for physical injury or physical sickness.
- Compensation for emotional distress due to physical injury or sickness.
- Compensation for medical expenses. If you deduct a medical expense and are later reimbursed by an award or settlement, you must report the previously deducted amount as income on your tax return for the year you receive the money.
- Compensation for lost wages due to a physical injury.
When Are Settlements Taxed?
In general, in Florida, personal injury settlements are not taxed. There are, however, certain damages you may receive along with your injury claim that could be taxable. These include:
- Punitive Damages: Punitive damages go beyond the cost of the initial loss, and therefore are considered a form of income. They will be taxed by the IRS.
- Interest: Interest, like punitive damages, is a form of income which is above the cost of the initial damages. It will be considered taxable income by the IRS.
- Lost Wages: Your wages are part of your income, and therefore the IRS will treat these as a form of taxable income.
- Emotional Distress: If you have suffered emotional distress as a direct result of the injury, it will not be considered taxable income. However, if the distress is not related to the injury, it will be taxed.
- Invasion of Privacy: Invasion of privacy is not directly related to the costs incurred from the injury, and is therefore a punitive damage which will be taxed.
- Discrimination: Discrimination often results in lost wages, making it a form of compensatory income and thus, taxable.
- Harassment: Harassment is only taxed by the IRS in relation to the injury incurred. However, if the harassment caused emotional distress or injury, it may not be taxable. This is really dependent on a case-by-case basis.
- Wrongful Termination: Wrongful termination falls under the lost wages category, and is taxed.
- Defamation: Defamation is normally related to lost income, and is therefore considered taxable compensation.
How To Ensure A Highly Non-Taxable Settlement
If you have filed multiple claims against the defendant, there is a possibility that one claim is for a personal injury and another one is not related to personal injury. If this is the case in your situation, particularly if the personal injury claim is much larger than the non-personal injury claim, you should have the settlement agreement explicitly state which amount of the settlement is for the personal injury claim, and which amount is for the non-personal injury claim. This way, you will not be forced to pay taxes on any amounts which would be considered tax free. Taxation rules are fraught with exceptions and nuances. Make sure you receive legal advice from experienced personal injury attorneys to minimize your tax liability and receive the maximum compensation owed to you.