Do I have to pay taxes on my personal injury settlement?
When tax season rolls around, we often have clients asking us this question. If you received a personal injury settlement, you might wonder if you have to pay taxes on it. The answer to this question is not always straightforward, but generally, the answer is, “no”. As with any tax-related question, the answer depends on a number of factors. Keep in mind the information provided in this article is of a general nature for claims in Florida. For your specific matter, you should consult with an attorney or tax professional.
Will My Settlement Be Taxed
As a general rule, personal injury settlements are not taxable by the IRS. Other states may have different rules. Florida, however, does not collect income tax, so in Florida, you will not have to pay federal income tax, state income tax, or Social Security tax on the settlement amount you received. Most states do not consider a personal injury settlement to be income. The federal government does not tax your settlement since the money received is intended to compensate you for the losses that you suffered. This applies to both actual economic damages (such as medical bills and lost wages) and non-economic damages (such as pain and suffering). Since these are compensatory damages, the IRS considers the loss you experienced to be equal to the amount of money you received from your settlement. In other words, your losses cancel out any gains you received from the settlement, therefore, you didn’t receive income.
As for lost wages, even though you would have been taxed on the wages if you didn’t lose them from the accident, IRS rules still hold that, “The entire amount received by an individual in settlement of a suit for personal injuries sustained in an accident, including the portion of the amount allocable to the claim for lost wages, is excludable from the individual’s gross income.” (IRS Rev. Rul. 85-97)
Exceptions to the Taxes and Settlement Rules
Despite this general rule, there are some exceptions. Pain and suffering or emotional distress damages are only excludable from your income if they are the result of a physical injury. Also, if you previously claimed a tax deduction for medical expenses related to your personal injury case, and then you later receive compensation for those expenses, you are required to report that portion of the settlement, if that resulted in a tax benefit to you. So you can’t double-dip on taking the deduction and then get reimbursed for the same medical expenses. This can get complicated, so talk to a tax professional when in doubt.
Another exception occurs with punitive damages, which are taxable. Punitive damages are intended to penalize the defendant for his or her actions. They are not intended to compensate for your injuries.
What Can You Do to Protect Yourself
In case you’re unclear about the tax implications of your personal injury settlement, speak with a tax professional or your attorney. They can help you understand your specific situation and determine how your settlement will be taxed.
In conclusion, personal injury settlements in Florida are generally not taxable. However, there are some exceptions to this rule. If you have questions about a personal injury case, call C. Todd Smith Law today for your free consultation. Not only do we fight the insurance companies to get you the fair result you deserve, but our team will also advise you about any tax liability, if any.