Do I Have to Pay Taxes on My Personal Injury Lawsuit Settlement?

Does a Victim Have to Pay Taxes on a Personal Injury Lawsuit Settlement?

dividing marital assetsThere are very few absolutes in this world, but many would agree that among them are death, trouble and taxes. However, when it comes to a personal injury lawsuit settlement, is paying taxes an absolute certainty?

Are Personal Injury Lawsuit Settlements Taxable?

In many cases, under both federal and state law, a personal injury lawsuit settlement is not taxable. Whether you settled the case before filing a lawsuit or filed a lawsuit before settling your case, generally you do not have to pay taxes on the proceeds from a personal injury settlement.

Under federal law, people usually do not have to pay taxes on income they receive as a result of physical sickness or injuries. Therefore, most personal injury settlements are not taxable under federal tax law. However, there are exceptions that could result in a personal injury settlement becoming taxable. For instance, if the basis of a personal injury case is breach of contract instead of the physical injury or sickness that the breach of contract led to, then you may have to pay taxes on the proceeds from that case’s settlement.

In addition, punitive damages, such as damages you receive for mental anguish, are taxable. For this reason, your attorney will probably ask for two separate verdicts or settlements. One will be for compensatory damages, which may not be taxable and the other will be for punitive damages, which could be taxable. That way, you can prove to the Internal Revenue Service (IRS) that part of your settlement was not taxable.

If you have questions about how personal injury cases work, please contact the experienced San Jose personal injury attorneys at Needham Kepner & Fish LLP today.





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