After a personal injury, medical bills continue to pile up, creating deep financial problems. Fortunately, you can ease your financial burden by filing a personal injury claim to receive compensation for your injuries.
Many people are concerned about how much of their settlement amount will be whittled down by taxes. In this post, you will learn how taxes can potentially impact the amount of your settlement you can keep vs how much goes to Uncle Sam.
Federal tax laws (IRS Publication 4345) state that personal injury settlements will not be taxable with the exception of punitive damages. In other words, the settlement amount will not be included in the gross income paid on taxes. The IRS tax rules specify that any settlement amount you receive for the following reasons will not be taxable:
What this means is that any compensation you receive for an economic loss like medical bills and loss of income and for non-economic damages like the physical and emotional pain is tax-deductible.
However, there are two exceptions regarding taxation of personal injury settlement amount that you should know.
Double dipping is not allowed when it comes to tax exemption for personal injury settlement amount. If you had received any tax benefit in the past related to personal injury expenses, you can't claim additional benefits.
For example, if you deducted medical care expenses incurred in treating a car accident injury, you won't be able to deduct the amount again from the personal injury settlement amount. The amount will be considered other income that will be taxed.
If you have received an interest on personal injury settlement amount, the interest income is not exempted. Uncle Sam will deduct taxes on this interest income.
The post has given a brief overview of taxation on the personal injury settlement amount. Learning about the tax impact on settlement amount will allow you to estimate how much you'll be able to actually keep from your settlement. It's recommended that you contact an injury Guru to learn more about your specific case. There are other issues regarding the settlement amount that you should discuss with your personal injury attorney.
A personal injury attorney will provide you with expert legal counsel regarding your case and will help you maximize the settlement amount by developing a strategy for exemptions that are applicable to your case. An experienced personal injury attorney will help you get the best possible representation that will increase your chances of a large settlement payout. However, for all tax questions you should always consult your tax professional - this article should not be misconstrued as financial or tax advice.
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