Can the IRS Tax My Personal Injury Claim?

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It’s Tax Season – Discover If You Need to Claim Injury Compensation

After a personal injury or accident, victims who suffer from any form of physical harm may be eligible for compensation to help cover any expenses or suffering they endured. After an ordeal like this, the last thing anyone wants to worry about is having to pay the IRS when tax season arrives.

Thankfully, when it comes to certain types of compensation for injury settlements, some of it is non-taxable and will not be subject to taxation when it comes time to report your earnings. However, there are some stipulations to this! Certain types of settlements for accidents will require victims to pay taxes, while others will not.  Prior to 1996, almost all types of personal injury settlements were tax-free,  but today the rules designate the difference between mental anguish and physical injury and how this type of compensation is levied by the IRS during tax season.

Having an experienced attorney helps you navigate through the legal waters during your case can help you understand what you may be entitled to and how much of that money will be subject to taxes by the IRS.

The Difference Between Settlement Types

After winning a settlement, the money you receive to help cover any expenses or damages incurred during that time will either be taxable, nontaxable, or partially taxable. This will ultimately depend on the details of the case and the type of compensation you are awarded for the injuries suffered. This will apply regardless of whether it was settled out of court or rewarded as a result of winning a case against the defendant.

What determines the taxable status of this type of settlement is generally based on the details of the accident and whether the victim sustained any “physical injury or physical sickness.” Guidelines implemented by Internal Revenue Service (IRS) do exist, but the can be difficult to understand and pinpoint exactly what type is taxable. That being said,  federal tax law specifically excludes monetary compensation for personal physical injuries or physical sickness from your gross income come tax time. 

So what exactly does this mean?

Generally speaking, the only type of personal injury damages that will not be subject to taxes is any type of compensation that is relative to an accident that resulted in a physical injury, such as breaking a bone or needing surgery and medical care. Any compensation that is intended to address costs related to this issue, such as medical fees, lost wages, or any emotional distress caused by the accidents (for example, anti-depressants required as a result of being out of work or suffering severe injuries) will not be subject to taxes.

What Is Subject to Taxes?

Aside from reparations for damages directly related to any injury or damage, someone involved in a personal injury suit may also be entitled to other types of compensation.

For example, punitive damages may be awarded to the victim to compensation for gross negligence or outrageous content on behalf of the defendant. This type of settlement will be subject to taxation by the IRS. It’s not common to receive this type of compensation in a claim, but it is possible – and can be helpful to know ahead of time so your attorney can request clarity on the types of damages you are being awarded.

 Other types of compensation that will generally be subject to taxes are any damages being rewarded for emotional distress or mental anguish.  If you did not sustain any physical injury from an accident, but now struggle with mental health issues or trauma, you may be eligible for compensation to account for any expenses related to this. However, this type of reparation must be claimed on your taxes when you file.

Navigating the Gray Areas

Of course, there is some confusion here. For example, if you sustained mental anguish or distress as a direct result of your accident (such as PTSD from a traumatic injury), you will be eligible to receive compensation for this. However, since it was a clear result of the physical injury, this will be considered part of the nontaxable damages and you will not have to claim it on your taxes.

 Another thing to consider is if you have already deducted out-of-pocket expenses on a previous tax return, you may still have to claim your reparations.  Otherwise, you may be found guilty by the IRS of something called “double-dipping”, which is not allowed and may be subject to fines.

The best way to ensure that you are 100% sure of the type of compensation you are receiving, how much you will get, and whether it will be taxable or not is to enlist assistance from one of Florida’s top-rated personal injury attorneys. At the DRG Law Firm, our lawyers are available around the clock to help clients all over Miami and surrounding South Florida cities who may have been involved in a slip and fall or similar accident. Call us at 888-413-8353 to learn how to set up a FREE consultation.