Do I have to Pay Taxes on my Personal Injury Compensation?

Typically, no. When you receive compensation for the damages you suffered in an accident, that money is yours to use to offset the expenses you faced because of the injury, like your medical bills and the wages you could not earn while you were out of work to recover.

Like many other legal situations, though, there are exceptions to this. Certain parts of a personal injury settlement may be taxed, and the cause of the victim’s injury can render his or her settlement taxable.

Scenarios where Personal Injury Compensation is Taxed

When a claimant’s injury is the result of a breach of contract, the compensation he or she receives is taxable. It does not matter if the compensation is meant to cover the same damages as compensation from a personal injury claim – if a breach of contract is the reason for the victim’s lawsuit, he or she must pay taxes on the compensation he or she receives.

When an individual receives punitive damages as part of his or her compensation package, this, too, is taxed.

If the individual’s claim was for emotional distress, rather than a physical injury, his or her compensation package is taxable.

Although a personal injury settlement is not taxable, the interest on it is. When there is a lapse of time between the date a personal injury verdict is entered and the day the victim receives payment, the compensation accrues interest.

Allocating your Compensation Package to Reduce its Tax Liability

Because punitive damages are taxed and compensation for damages directly related to an injury are not, it is important that the punitive damages amount is clearly stated in the compensation settlement to ensure that it is the only part taxed. This is also important if the victim receives compensation in two or more claims against the negligent party, one of which is not a personal injury claim.

Determining exactly which parts of your settlement package are taxable and how to report them correctly can be complicated. If you receive monetary compensation for the damages you suffered in an accident, bring all the paperwork related to the settlement to your accountant to determine how to include it in your tax return. Failing to include compensation that you are required to include in your tax return can result in a tax penalty for you later.

Work with Draper Law Office to Pursue Compensation for your Personal Injury Damages

If you were injured in an accident, you could be entitled to recover monetary compensation for your damages through a personal injury claim. Contact our team of experienced personal injury lawyers at Draper Law Office today online or by calling 866-767-4711 to schedule your initial consultation in one of our two office locations: Kissimmee, and Orlando.