Do you have to pay taxes on your personal injury settlement? Believe it or not, personal injury lawyers get asked this question a lot. The answers are discussed below.
Your personal injury lawyer will tell you that your settlement will generally not be taxed. This tends to pertain to the portion that is designed to compensate you for your personal injuries. However, there are some exceptions.
Whatever you’re paid for personal injuries is not taxed. Personal injury lawyers know that the portion of your settlement that covers payments for your personal injuries can’t be taxed. At least, not by the federal government. You can rest assured that the state you live in won’t levy taxes on this amount either. Thus, you can be sure that most of the money you receive for your injuries is all yours. Whether you take a lumpsum amount or structured payment settlement has been agreed upon, it is important that you are aware of your rights. You might want to talk with an accountant to get better idea about your tax liabilities and understand the tax breaks you are getting. Your personal injury lawyer will tell you that one of the exceptions is punitive damages awards. Just remember that you can deduct the fees you will pay your lawyer on your tax return. However, punitive damages rarely appear in personal injury settlements.
Can a punitive damages settlement be taxed?
Personal Injury Lawyer in Hamilton know that punitive damages settlement can be taxed in theory. You can get around this by having your lawyer draft and submit documents that state that no part of your settlement will consist of punitive damages. You no longer have to worry about the punitive damages’ settlement in this instance. The documents must explain this in clear and easy to understand language. They should also provide evidence and examples of this.
Of course, you should know that punitive damages settlements in states that only permit these types of settlements in wrongful death cases are not taxable. It is best to allow your lawyer to explain the integrities of the settlement as legalese can be difficult to understand. It is better to pay the tax than have IRS on your trail. Thus, be clear about the taxation aspect, if applicable.
Refer to a tax attorney
Since personal injury settlements can sometimes be taxed, your personal injury lawyer may refer you to a tax attorney. They will be able to help you unravel the settlement details and if anything does need to be taxed, you will be informed. However, keep in mind that most of your personal injury settlement will generally not be taxed at all!