Personal Injury Awards | How Do They Affect Your Taxes?
Personal injury awards can impact your income taxes significantly, depending on the type of award you receive. Whether or not you pay taxes on any of the amount awarded depends on what the monies are awarded for. Although the federal government has established set guidelines for how taxes are paid on injury awards, they can be somewhat confusing, particularly if the settlement is large and covers more than one type of damage.
The most common personal injury award is for compensatory damages. Compensatory damages are intended to reimburse you for expenses you incurred as a direct result of the accident. These awards can vary and are based on specific individual factors. Often, however, they include medical expenses. If you do not take a tax deduction for these expenses, then that money will not be taxed. However, if you have received a tax deduction on the amount you paid, then you will be required to pay taxes on that amount. In complex cases, it can be difficult to parse out the correct taxable amount. Talking with a Roseville
Any award given for emotional pain or mental anguish is treated the same as an award for physical injuries. If you deducted those costs on your taxes, then you will have to pay tax on that amount.
Another common type of award is for lost wages. Since this money is intended to make up for salary that you lost, you will be required to pay taxes on that amount. The amount of tax you owe could potentially be affected by other types of awards that you receive as well, so consulting a professional may be necessary to ensure that you pay the correct amount.
Reimbursements for lost property, such as a vehicle, are not taxed unless the amount awarded is greater than the value of the property. If the amount awarded exceeds that value, then that amount is considered income and will be taxed accordingly.
Punitive damages are those that are intended to punish the person or entity that caused your injury. These types of awards are not as common as compensatory, property or lost earning damages, but they do happen in cases where gross negligence or a willful act cause significant harm or disability. This type of award is almost always subject to income tax, as it is viewed as income by the IRS. The amount of tax you owe will vary based on the amount that you receive, and other personal factors.
In addition, your personal injury award may affect the amount you pay for health insurance if you are receiving a discount from the Health Insurance Marketplace. The monthly cost of that insurance is calculated based on your expected income for the upcoming year. If enough of your settlement is considered income, then your monthly payment will likely need to be adjusted so that you will not be penalized at tax time.
Although the federal tax liability guidelines for personal injury awards are intended to clarify the tax issue, they are still open to interpretation. In some cases, understanding the amount of tax you owe can be very complicated. State tax liability for personal injury awards may also be a challenge to understand, and they may vary significantly from state to state. Talking with an attorney who is familiar with tax law in your area is the most effective way to ensure that you pay for only legitimate taxable amounts, and that you avoid any penalties or other negative consequences that may be associated with receiving a large sum of money.
Thanks to our friends and contributors from Meyer & Yee, LLP for their insight into medical malpractice cases.
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