Tax Season is HERE! This means that people are thinking about having to get their taxes and financial affairs in order to pay Uncle Sam. Taxes are an area that is unfamiliar to most people. Whenever someone deals with something that’s new to them, such as a personal injury settlement, it’s normal for them to ask, “Is my personal injury settlement taxable?” This is a prudent question indeed, which we’ll be happy to answer below.
Before we get into the tax aspect of personal injury cases, we want to make it known that upwards of 95% of personal injury claims settle outside of court. However, whether a plaintiff (injured party) settles during negotiations or wins at trial, the tax consequences are the same.
Suppose you file a personal claim and you settle before or during trial. After the contingency fees and medical bills are paid, you get your check. But do you have to give a certain percentage to the IRS?
Most Personal Injury Settlements Are Not Taxable
For the most part, personal injury settlements are NOT taxable under federal or South Carolina law. It doesn’t matter if you won in a jury trial or settled before ever seeing the inside of a courtroom.
Neither the state, nor the IRS can charge taxes on a personal injury settlement in the majority of personal injury claims. Under federal tax law, a plaintiff’s personal injury damages for personal and physical injuries are excluded from their gross income – this is music to people’s ears.
The following types of personal injury damages are not taxable as long as they result from the plaintiff’s personal injury or illness (an illness caused by negligence):
- Medical bills
- Pain and suffering
- Emotional distress
- Attorney fees
- Loss of consortium
- Lost income
Are There Exceptions to the Rule?
While most personal injury settlements are not taxable, there are two exceptions. First, if a plaintiff receives damages in a breach of contract case, even if it resulted in physical injuries or an illness, the damages are taxable.
Second, punitive damages are also taxable. If your claim involves punitive damages, your personal injury attorney can seek to have them kept separate from your compensatory damages. By doing this, you can show the IRS that part of your verdict involves non-taxable compensatory damages.
Related: WARNINGS about dealing with insurance companies after a car accident
Need a personal injury attorney to help you file a claim for compensation? Contact Lowcountry Law for a free case evaluation today.