Posted on Monday, August 21st, 2017 at 6:45 am
When you are injured in an accident, you might be entitled to receive compensation for your injuries and damages. For example, if a negligent driver causes a crash, or you slip and fall at the store, you may recover money for your medical bills, lost wages, and other damages. In many cases, your settlement will not be taxed; however, there are some types of compensation that can be taxed by the Internal Revenue Service or the State of California.
Medical Bills and Expenses
Medical expenses can be a large portion of a personal injury settlement. When you are reimbursed for medical expenses, that money is not taxed in most cases. However, if you claimed the medical bills on your tax return, you might be required to pay taxes on a portion of your injury settlement.
Lost Wages and Loss of Income
The portion of your settlement that is intended to reimburse you for loss of income can be taxed as income. Because your wages would have been taxed had you not had the accident, the IRS takes the position that reimbursement for lost wages is taxable. You should consult an experienced Sacramento personal injury attorney and tax professional for more information.
Physical Injuries and Physical Sickness
Personal injury settlements also include amounts for the physical pain and injury you suffer because of the accident. Compensation for physical pain and suffering are usually not taxable if the pain and suffering are the direct result of a physical injury or illness sustained in the accident.
Emotional Distress and Mental Anguish
In addition to compensation for the physical pain and suffering, you may also receive compensation for your mental anguish and emotional distress. The compensation for emotional distress and mental anguish is usually not taxable if the distress and anguish are caused by a physical injury or illness sustained in the accident. If your claim does not include a physical injury or illness, the compensation for emotional suffering and mental anguish may be considered taxable income.
Property Damages
According to the IRS, compensation for property damages is not taxable unless the amount you receive is more than the adjusted basis of your property. Amounts over the adjusted basis can be taxed as income.
Interest and Punitive Damages
Interest and punitive damages are not very common; however, some claims may qualify for these types of compensation. If so, you are required to pay taxes on this compensation because interest and punitive damages are considered income for tax purposes.
For more information, you can see the IRS publication explaining the taxability of settlements.
Call a Sacramento Personal Injury Attorney for a Free Appointment
Personal injury settlements can be complex. In some cases, the way a settlement agreement is worded can have a significant impact on whether your proceeds are taxable or non-taxable. Before you agree to accept a settlement agreement, you should consult with our Sacramento personal injury attorney to discuss your options and legal rights. We want you to receive full compensation for your losses and injuries.
Contact The Tiemann Law Firm by calling (916) 999-9000 or by visiting our website. We offer free consultations and no-obligation case evaluations, so you can get the information you need to pursue an accident claim.
