Personal Injury Compensation and Taxes

 Posted on January 09, 2017 in Personal Injury

At the conclusion of a successful personal injury lawsuit, the injured person collects financial damages as well as attorney’s fees and costs. As the money is changing hands, however, you may need to consider the tax consequences of the judgment or settlement. Depending on the types of damages received and on the type of case, you may have to pay taxes on all or part of the damages you receive in a personal injury case.

Physical Harm

Generally, personal injury damages are not taxable if they are related to a physical injury or physical illness. This rule applies regardless of whether the damages are received as a judgment after the completion of a trial, a settlement payment without filing suit at all, or anything in between. With some exceptions, such compensation is not included in gross income for tax purposes. However, if the injured person deducted medical expenses on a past tax return, then he or she must pay taxes on that amount that is recovered in a personal injury suit.

The law requires that, for the rule exempting damages from income to apply, a physical injury or illness is required. For example, a case in which the victim suffered a broken arm from a car accident, or an illness resulting from medical malpractice, would qualify.

Lost Wages

While most personal injury damages are not taxable, there are several exceptions to this rule. One exception is for damages awarded to compensate the victim for lost wages. Wages would normally be included on a W-2 form and be reported as taxable income. Because compensation for lost wages is income, it is thus taxable.

Punitive Damages

Punitive damages are damages awarded to punish the wrongdoer, rather than to compensate the victim for losses. Awards of punitive damages go above what is required to compensate the injured person for his or her losses. They are generally taxable, whether or not there is an accompanying physical injury.

No Physical Harm

If the case involved no physical harm, such as in a defamation case that damages the victim’s reputation, the damage award will usually be taxable. For example, Alice makes death threats to Bob, who is so frightened that it causes severe anxiety and stress, and he has to see a psychiatrist. If Bob then sues Alice for intentional infliction of emotional distress, he will likely have to pay taxes on his recovery. But if the emotional distress is accompanied by a physical harm, then damages are not taxable. For example, if Bob’s stress causes severe headaches and ulcers, then the damages may not be taxable.

Interest

Illinois law allows an injured person to collect on a personal injury judgment or settlement. The court may order that interest be paid on the damages dating from the date the suit was filed. Interest payments are generally taxable.

Get Help With Your Claim

When you have suffered an injury as the result of someone else’s actions or negligence, an experienced attorney can help you collect compensation for your harm. If you think you might have a personal injury case, contact an experienced DuPage County personal injury lawyer. Call 630-920-8855 to schedule a free, no-obligation consultation at Martoccio & Martoccio today.

Sources:

https://www.law.cornell.edu/uscode/text/26/104

http://www.ilga.gov/legislation/ilcs/ilcs4.asp?ActID=2017&ChapterID=56&SeqStart=22050000&SeqEnd=22150000