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Can My Judgment or Settlement Award Be Taxed?

Personal Injury Settlement and the IRS

Accidents on the road that involve vehicles like cars, trucks, motorcycles, bicycles, and/or pedestrians will inevitably lead to lawsuits that will be handled personal injury lawyers, or often will be handled by insurance companies in place of the insured parties. Parties or their insurance companies will also typically seek to negotiate a settlement to avoid a lawsuit where there is less certainty as to how a judge or jury will see the facts and assign liability. Whether by a judgment handed down by a jury or judge, or through a settlement amount, the party or parties who receive a judgment must be aware of possible tax consequences from that award. In many cases judgment amounts or settlement amounts will not be taxed, but this is not an absolute rule.

Important Notes About Tax Liabilities

Under Internal Revenue Service regulations, money received for direct compensation of actual physical ailments, including injuries, sickness or illness that is a result of the underlying action that led to the settlement or judgment, is not taxable as part of an individual’s gross income. This is irrespective of how the money is received, either through a lump sum or through a payment plan. In the area of mental and emotional distress that results in a physical injury or illness, so long as there is a provable resulting physical ailment, these categorical damages can too be excluded from income. Damages for pure emotional distress, however, are not excluded under the code. Punitive damages (damages to punish the liable party), which are rare in the event of vehicle accidents because those accidents are typically just the result of negligence as opposed to intentional acts, are not excluded under these rules and so will more than likely be taxed by the IRS. Thus the bottom line is that damages arising from physical injuries, or emotional distress specifically leading to physical injuries, will be exempt from federal taxes.

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More easily quantifiable damages will typically be compensation for medical expenses and lost income, among other things. Medical expenses will almost always be part of a car accident lawsuit judgment or settlement. These compensatory damages for medical expenses will usually not be taxed because this money is specifically supposed to pay the injured party back for expenses that they would not have faced if not injured. Naturally, since this is a reimbursement it does not count as taxable income, as that would be quite unfair to the injured person who should not have had to pay those expenses him or herself in the first place. This also goes for money received for property damage, including the vehicle, as well as the expense of having to find alternate transportation, such as a rental car. Another category of compensatory damages – lost income – is, however, taxable, because it is just that: income. These are payments that the injured person would have been receiving and would have been taxed had the accident not occurred.

It is In Your Best Interests to Speak with a Personal Injury Attorney

The above summary of tax implications is merely a general description, and in large part only accounts for how the IRS will treat certain damages for the purpose of federal taxes. Each state may have its own specifics and nuances, and a person receiving a judgment or settlement award must be cognizant of what they owe in taxes. Having the Fort Lauderdale personal injury lawyer and if appropriate, the right accountant or financial adviser, is important, call the Law Office of Cohn & Smith PA today

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