get your free consultation
After securing a personal injury settlement, you may wonder, “Are personal injury settlements taxable?” The experienced St. Louis personal injury attorneys at Goldblatt + Singer understand that this question weighs heavily on the minds of our clients. We aim to provide clear, straightforward answers to help you understand the complexities of personal injury settlements and taxes.
Are personal injury settlements taxable? Are lawsuit settlements taxable? It depends. When determining the taxability of a settlement, you must consider the different types of compensation included in the settlement amount. Generally, the IRS categorizes settlement money into two main types: compensatory damages and punitive damages.
Compensatory damages compensate the injured party for their losses, such as medical expenses, lost wages, and pain and suffering. These damages typically do not count as taxable income. However, there are some exceptions. For example, if you claimed medical expenses as a deduction on your tax return in a previous year and later received compensation, you may need to pay taxes on that portion of the settlement.
While compensation for physical injuries and related emotional distress is generally not taxable, emotional distress damages not tied to a physical injury may be subject to taxation. This distinction can be complex, and it’s essential to consult a knowledgeable personal injury attorney. This ensures your settlement agreement is structured in the most tax-advantageous manner possible.
The IRS guides the taxability of personal injury settlements in Publication 4345, “Settlements – Taxability.” This publication outlines the general rules for determining whether a settlement is taxable.
According to the IRS, settlements for physical injuries or sickness are typically not taxable. This includes compensation for medical expenses, lost wages, and emotional distress from the physical injury.
If you receive a settlement for emotional distress unrelated to a physical injury, the IRS considers this amount taxable. However, you can exclude from your income any portion of the settlement used to pay for medical expenses related to the emotional distress as long as you did not claim these expenses as a deduction in a previous tax year. This exclusion can be significant, as the cost of treating emotional distress, such as therapy or medication, can be substantial.
It’s important to note that the tax treatment of settlements can vary depending on the specific circumstances of your personal injury case. For example, if your settlement includes compensation for property damage, such as a vehicle damaged in a car accident, the portion of the settlement allocated to property damage may be taxable if it exceeds the adjusted basis of the property.
Receiving a personal injury settlement can significantly impact your financial situation. To make the most of your settlement and secure your financial future, consider the following steps:
Determine your short-term and long-term financial goals and allocate your settlement funds accordingly. Consider setting aside money for immediate needs, such as medical bills and living expenses, and future costs, like ongoing care or education. A well-crafted budget can help ensure that your settlement funds last as long as possible and that you can meet your financial obligations.
Use a portion of your settlement to pay off high-interest debts, such as credit card balances or personal loans. This can help improve your credit score and reduce financial stress. You can free up more of your monthly income by eliminating high-interest debt for other expenses or savings goals.
Work with a financial advisor to develop an investment strategy that aligns with your goals and risk tolerance. Investing a portion of your settlement can help your money grow over time, providing a more secure financial future. Be sure to diversify your investments and consider a mix of short-term and long-term investment vehicles to balance risk and potential returns.
Set aside a portion of your settlement in a readily accessible account to cover unexpected expenses, such as car repairs or medical costs and emergencies. Aim to save enough to cover three to six months’ living expenses. An emergency fund can provide peace of mind and help you avoid relying on credit cards or loans when unexpected costs arise.
In some cases involving personal injury lawsuits, structured settlements may be more advantageous than lump-sum payments. A structured settlement provides periodic payments over time, which can help ensure a steady stream of income and potential tax benefits. Consult with your attorney to determine if a structured settlement suits your situation. Structured settlements can be particularly beneficial for individuals who may have difficulty managing a large lump sum or want to ensure a reliable source of income over an extended period.
If your injury requires ongoing medical treatment or care, be sure to allocate a portion of your settlement to cover these future expenses. This may include setting aside funds in a dedicated account or purchasing insurance products to cover long-term care needs. By planning, you can ensure you have the resources necessary to maintain your health and quality of life.
If you currently receive government benefits, such as Medicaid or Supplemental Security Income (SSI), receiving a personal injury settlement may impact your eligibility for these programs. Work with your attorney and a financial advisor to understand the potential implications of your settlement on your benefits and to develop a plan for managing your settlement funds to minimize any negative impact.
Are personal injury settlements taxable? If you have questions about the taxability of your personal injury settlement or need assistance with any aspect of your case, contact the experienced St. Louis personal injury attorneys at Goldblatt + Singer. You won’t need to pay our law firm anything upfront. Our legal team operates on a contingency fee basis. This means that if we get no compensation for you, you’ll owe us nothing. You can hire our personal injury lawyers risk-free.
Call us today at (314) 231-4100 or contact us online for a free consultation. We can take on the complexities of your personal injury claims and work to pursue the maximum compensation possible for your injuries—trust Goldblatt + Singer to be your partner in recovery and financial security.
Will a Personal Injury Settlement Account for the Long Term Cost of Paralysis?