4 Tax Tips for Your Personal Injury Settlement
Securing a personal injury settlement is the hard part, but if you’re not sure what to do after a settlement, you’re not alone. Many clients may have questions about taxes, attorney fees, and more. It’s important to know exactly how to handle your personal injury settlement after your case.
Pain and Suffering
According to the IRS, compensation that a person receives for physical injury is federal income tax-free. Whether you receive money from a settlement or an award after filing a lawsuit, physical injury compensation is tax-free. This includes emotional distress since it is considered as part of your physical injury.
Settlement money that’s paid to cover your medical expenses is also tax-free. However, if you claim a deduction on your taxes for accident-related medical expenses and receive those expenses as reimbursement for your case, you will have to pay tax on that amount because you benefited from its deduction.
Award Interest Paid
Typically, interest will not be part of your settlement, but interest could be part of an award that is later appealed. But if any part of your settlement or award is classified as interest, that part will be considered taxable.
Reimbursements for lost wages are tax-free, even though your normal wages are taxable. For example, you sustain injuries in an accident, claim medical expense deductions, and eventually receive an out-of-court settlement. This settlement covers medical expenses, pain and suffering, and lost wages and interest. In that case, only your deducted and reimbursed medical expenses and interest are taxable.
Keep in mind that you cannot deduct attorney fees to collect a settlement or tax-free award for injury.
Let’s say that some of your prize or settlement is tax-free and some of your settlement is taxable. Physical injury and loss of salary are tax-free, while interest is taxable. As a rule, you must report the complete amount of the taxable part of the award or settlement as revenue, without any decrease in the associated charges. After that, you can treat the fees related to the taxable portion as a miscellaneous itemized deduction on Schedule A of your Form 1040 for your taxes.
Personal Injury Attorney in Phoenix
After a personal injury case, determining the tax details for your settlement and expenses can be complicated. If you’ve sustained injuries in an accident or have questions about your case, contact your personal injury attorney. Your lawyer can help you organize the facts of your case, making the entire process hassle-free.
If you’ve been injured or have questions about your personal injury case, contact our Phoenix personal injury lawyers at ELG Law today. Call us at (623) 562-3838 for a free consultation and no-hassle legal aid.