The treatment of personal injury settlements can be complex, so unless you have a very straightforward personal injury case, it’s best to consult a qualified tax advisor.
Compensation for Physical Injury is Not Taxable
Physical injury settlements are not taxable. In other words, the money you receive in a physical injury settlement is not subject to federal tax.
The exception to this rule is if you receive compensation for lost wages or medical expenses, which are taxable as ordinary income even though they’re part of your personal injury recovery.
What are Exceptions to the General Rule?
Although the general rule is that all physical injuries are taxable, there are exceptions. These include:
● Physical injuries that were not paid for by insurance (such as broken bones).
● Physical injuries that were covered by workers’ compensation.
Claims for Emotional Injury Only
You may be able to claim a personal injury settlement for emotional injuries only if the following conditions are met:
● The emotional injury must be a recognized physical injury. For example, if you have been diagnosed with post-traumatic stress disorder (PTSD), this would qualify as an emotional injury.
● Your doctor has confirmed that your PTSD is caused by the physical injuries sustained in your accident; therefore, it can’t be considered separate from them.
If you are claiming only emotional damages and not physical injuries, then they are not taxable. However, if your claim includes both types of damages (physical and emotional), then the settlement must be reported on your tax return as taxable income.
If you have a wrongful death claim in addition to your medical malpractice claim, then all of the resulting damages will be considered taxable income, as per personal injury lawyer in Fergus.
Ensure That as Much of Your Settlement as Possible is Non-Taxable
If you have a settlement in the form of money, then it is important to ensure that as much of your settlement as possible is non-taxable. If you are not sure whether or not an amount is taxable, ask a tax advisor. The rules can change over time and there are many different factors involved with determining what is considered taxable or nontaxable.
If you want to avoid taxes on any income received from a personal injury claim, then it’s important that all funds received through successful legal action be used for medical expenses related directly to the accident and not simply transferred into investment account or spent on other things like vacations or cars (unless those were purchased with proceeds from the lawsuit).
The treatment of personal injury settlements can be complex, so unless you have a very straightforward personal injury case, it’s best to consult a qualified tax advisor.You might be wondering if your settlement is taxable. The answer to this question can be complicated, so it’s best to consult a qualified tax advisor before making any decisions about how your case will be handled.
If you have a personal injury claim, it’s important to understand how the IRS views your case. The best way to do so is by speaking with a qualified tax advisor who can help you navigate the complicated and often confusing rules surrounding this issue.