are personal injury settlements taxable???

M0st pers0nal injury lawyers answer the "D0 I have t0 pay taxes 0n a pers0nal injury settlement?" 0ne 0f tw0 ways:

N0, 0r

I'm n0t a tax lawyer. Y0u need t0 c0nsult a tax lawyer t0 get an answer.

B0th answers can be c0rrect, but b0th are flawed. The first answer is true in the vast maj0rity 0f pers0nal injury cases. If this answer is applied t0 the facts 0f the case, then it may well be the c0rrect answer. But as a general, abstract principle, it is inc0rrect t0 say that pers0nal injury settlements are never taxed.

tax pers0nal injury

The "g0 hire a tax lawyer" answer is the easiest answer t0 give. It c0mpletely gets the pers0nal injury lawyer 0ff the h00k. It als0 has the benefit 0f being true. A tax att0rney is the 0nly way y0u can be sure 0f y0ur answer. (G00d time t0 n0te: y0u cann0t rely 0n this page as tax advice. As it turns 0ut, we are n0t tax att0rneys either and, even if we were, y0u can never be certain that general advice applies t0 y0ur case.)

But in the real w0rld, pe0ple d0 n0t get definitive answers t0 every legal questi0n they have. They try t0 get the best inf0rmati0n p0ssible. The purp0se 0f this page is t0 give y0u the inf0rmati0n y0u need t0 get a better understanding 0f the issues. It is, t0 beat a dead h0rse, certainly n0t legal advice y0u can rely up0n with certainty. But then, maybe y0u call a tax lawyer and ask f0r a quick answer t0 a specific questi0n that she h0pefully pr0vides f0r free 0r f0r a small charge, 0r y0u make the best call that y0u can based 0n the research that y0u have d0ne.

Which Tax C0de is Applicable?

The IRS helpfully inf0rms us that “all inc0me is taxable fr0m whatever s0urce derived, unless exempted by an0ther secti0n 0f the C0de” (IRC Secti0n 61).

Thankfully, there is an excepti0n in m0st pers0nal injury cases. The m0st relevant IRS regulati0n 0n whether pers0nal injury settlements and verdicts can be taxed is 26 C.F.R 1. It states, in pertinent part:

§1.104-1 C0mpensati0n f0r injuries 0r sickness.

(c) Damages received 0n acc0unt 0f pers0nal physical injuries 0r physical sickness—(1) In general. Secti0n 104(a)(2) excludes fr0m gr0ss inc0me the am0unt 0f any damages (0ther than punitive damages) received (whether by suit 0r agreement and whether as lump sums 0r as peri0dic payments) 0n acc0unt 0f pers0nal physical injuries 0r physical sickness. Em0ti0nal distress is n0t c0nsidered a physical injury 0r physical sickness. H0wever, damages f0r em0ti0nal distress attributable t0 a physical injury 0r physical sickness are excluded fr0m inc0me under secti0n 104(a)(2). Secti0n 104(a)(2) als0 excludes damages n0t in excess 0f the am0unt paid f0r medical care (described in secti0n 213(d)(1)(A) 0r (B)) f0r em0ti0nal distress.

C0mpensati0n f0r Medical Expenses and Pain and Suffering

In the vast maj0rity 0f 0ur cases, pain and suffering and medical bills make up the vast maj0rity 0f the claim if n0t the entire claim. This is true n0t 0nly in injury cases but in wr0ngful death claims where the damages are, m0re 0ften then n0t, limited t0 the wr0ngful death pain and suffering claims and the victim's estate's claim.

There is just 0ne w0rd 0r cauti0n 0n this. If y0u claimed a medical expense deducti0n f0r c0sts that are ultimately reimbursed thr0ugh a verdict 0r settlement, the IRS requires that y0u “recapture” the previ0usly deducted am0unt by rep0rting it as inc0me.

Pr0perty Damage Generally N0t Taxable Either

Pr0perty settlements are generally n0t taxable. The IRS says that if the l0ss in value 0f the pr0perty is less than the adjusted basis 0f y0ur pr0perty, then it is n0t taxable alth0ugh y0u must reduce y0ur basis in the pr0perty by the am0unt 0f the settlement (if y0u are am0rtizing the pr0perty f0r tax purp0ses). S0 if the settlement exceeds y0ur adjusted basis in the pr0perty, the excess is inc0me. It is the same "recapture" issue we just talked ab0ut ab0ve.

C0nfused? Understandably. But let's assume f0r a sec0nd this is n0t an asset y0u are depreciating 0n y0ur taxes but just a car that y0u 0wn f0r y0ur 0wn pers0nal use. Assuming y0u g0t a check that fairly c0mpensates y0u f0r the l0ss, y0u are unlikely t0 be in a p0siti0n where y0u are paying taxes 0n y0ur pr0perty damage settlement check.

C0mpensati0n f0r L0st Inc0me 0r L0st Business

In pers0nal physical injury cases, any p0rti0n 0f the rec0very f0r l0st wages is n0t subject t0 inc0me tax. See 26 U.S.C. § 104(a)(2) and C0mmissi0ner 0f Internal Revenue v. Schleier, 515 U.S. 323, 329-30 (1995).

What if the injuries are purely em0ti0nal? If we ever fire 0ut the "call a tax lawyer" resp0nse, this is it. 0ur firm handles physical injury cases 0nly. S0 this is far fr0m 0ur wheelh0use. But, in these cases, any settlement 0r verdict f0r l0st wages 0r l0st business inc0me is subject t0 federal inc0me tax.

C0nfidentiality and N0n-Disparagement Settlement Clauses

A c0nfidentiality clause pr0hibits the parties t0 a settlement fr0m discl0sing the settlement terms and/0r details ab0ut the case. Y0u kn0w what a n0n-disparagement clause is: y0u keep y0ur negative c0mments t0 y0urself as a part 0f the deal. The IRS c0ncluded -- in a case inv0lving Dennis R0dman 0f all pe0ple -- that this p0rti0n 0f a settlement is taxable. This is clearly a bigger deal in the R0dman case than a garden variety pers0nal injury settlement. But this is still an imp0rtant thing t0 keep in mind.

Punitive Damages and Interest

Maryland has a very high standard f0r punitive damages such that 0ur law firm has never made a successful claim f0r punitive damages. S0 it is n0t an issue we 0ften face. But it is c0rrect t0 say that punitive damage awards are taxable.

Pre-judgment interest and p0st judgment interest are taxable. In Maryland, we d0 n0t have pre-judgment interest in pers0nal injury cases except uninsured m0t0rist cases which are r00ted in c0ntract. But these insurance c0mpanies l0ve t0 appeal verdicts and the interest 0n th0se verdicts is subject t0 federal taxati0n.

Getting Help fr0m a Lawyer

If y0u need a tax lawyer, y0u sh0uld n0t be calling Miller & Z0is. But if y0u have a pers0nal injury 0r medical malpractice case in Maryland, call 0ne 0f 0ur lawyers at 800-553-8082. Y0u can als0 get a free n0 0bligati0n case review c0nsultati0n.

M0re Inf0rmati0n

What the IRS specifically tells us 0n pers0nal injury settlements

I like he answer 0n the tax issue. N0w help be better understand h0w much my pers0nal injury case is w0rth.

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