The Mn Criminal Defense, Personal Injury & Family Law Blog
How Are Personal Injury Settlements Taxable in Minnesota?
May 31, 2021
The median personal injury settlement amount in Minnesota is $30,000. But, depending on the details of your case, you could get even more money, like the Minnesota motorcyclist who won a nearly $1 million accident settlement last year. If you’ve been injured or fallen ill due to an accident and are awaiting compensation, you may be wondering, How are personal injury settlements taxable?
Some personal injury settlements are taxable in Minnesota. It depends on whether the amount is for compensatory or non-compensatory damages. Most compensatory damages in personal injury settlements aren’t taxable in Minnesota. But you will have to pay income taxes on awards for non-compensatory, punitive damages.
What’s the difference between compensatory and non-compensatory settlements? And why are they taxed differently We’re explaining the answers to these questions next, so keep reading.
Compensatory Damage Settlements: Explained
Courts award personal injury settlements to plaintiffs injured in accidents caused by negligence. In some situations, the plaintiff may hold partial responsibility for the accident. But because of Minnesota’s comparative negligence rule, a plaintiff can file a personal injury suit as long as he or she held less than 50% responsibility for the accident.
Personal injury settlements reimburse the plaintiff for accident-related expenses. These expenses might include medical bills, lost income, or pain and suffering.
A settlement that reimburses the plaintiff for any of the above costs is awarding compensatory damages. Courts further distinguish between economic and non-economic compensatory damages.
Take, for instance, a Wrongful Death lawsuit. The surviving heirs often receive economic and non-economic compensatory damages.
Economic compensation would include funds for funeral expenses or to replace the deceased’s lost wages. Non-economic wrongful death damages might be compensation for pain and suffering or loss of consortium.
Keep reading to learn more about how Minnesota courts distinguish between these two types of compensatory damages.
Economic Compensatory Damages
Settlements covering economic compensatory damages reimburse plaintiffs for accident-related expenses. The most common forms of economic compensations are for medical bills, property damage, and lost wages or business income.
To file a personal injury lawsuit, you must have suffered an injury or illness as a direct result of the accident. Accidental injuries and illnesses often require medical attention, which can be extremely expensive.
Economic compensatory damages can reimburse any medical bills incurred from your injury or illness.
Courts recognize psychological injuries and illnesses in the same way as physical maladies. That means you can receive a settlement for bills incurred to treat accident-related mental health issues.
Property damage or loss isn’t always part of a personal injury case. But, say the accident also affected your vehicle or home. Then, the court may order the defendant to pay out economic compensation for property damage as part of the settlement.
Did your accident-related injury or illness result in days missed from work? You could be entitled to economic compensatory damages in the form of lost wages repayment. Business owners can also recover loss of business income in a personal injury suit.
The court will add your lost wages or income to the total settlement amount. Designated lost income funds should roughly equal the money you or your business lost due to your injury or illness.
Non-Economic Compensatory Damages
In personal injury cases, there are some losses that are hard to quantify. The legal world calls these “non-economic” compensatory damages. Non-economic compensatory damages include decreases in quality of life and pain and suffering.
Minnesota personal injury attorneys use one of two strategies to determine settlement amounts for non-economic damages.
The first is to take the economic compensatory damages settlement amount and multiply it by three. In the second method, the court orders the defendant to pay a certain amount for each day the plaintiff is in recovery post-accident.
Non-economic settlements can be difficult to win without a seasoned attorney. But the potential for such a high payout makes these lawsuits worth it for many personal injury plaintiffs.
Quality of Life Losses
Accidents can cause significant reductions in quality of life. Quality of life compensation attempts to reimburse the plaintiff of a personal injury suit for things like:
Loss of mobility
Damages to quality of life are highly subjective in nature. That’s why you’ll have a hard time winning a settlement for quality of life losses without the best personal injury lawyer arguing your case.
Pain and Suffering
“Pain and suffering” is another non-economic compensatory damage. The term refers to physical as well as psychological pain and suffering. To qualify for a settlement, your pain and suffering must have a direct link to the accident or the injuries you received from the accident.
As with losses in quality of life, it can be challenging to prove the link between the accident and pain and suffering. However, some physical pieces of evidence should suffice as proof of pain and suffering. This includes journal or diary entries, statements from your relatives and friends, and treatment records from a licensed mental health professional.
What Are Punitive Damage Settlements?
Legal experts contrast compensatory damages with punitive damages. Punitive damage awards don’t replace something lost due to the accident.
Instead, courts order defendants to pay punitive damages as a punishment, usually for accidents caused intentionally or by “wanton and willful misconduct.”
Sometimes, personal injury plaintiffs are eligible for an additional punitive damages settlement. But punitive damages are awarded at the court’s discretion.
Which Personal Injury Settlements Are Taxable?
In Minnesota, most compensatory personal injury settlements aren’t taxable. This is true for settlements awarded in one lump sum and settlements awarded in installments.
How are personal injury settlements taxable in Minnesota? You will always have to pay taxes on punitive damages settlements. But there are also some specific cases where the IRS requires you to report compensatory settlements as income on your taxes.
If the defendant pays the settlement in installments, you may receive interest payments on the total amount. The IRS requires you to report these additional charges as “Interest Income” on your personal tax form.
Deducted Medical Expenses
Most of the time, plaintiffs don’t have to report settlement money received as reimbursement for medical expenses on their taxes. The one exception is if you paid for the medical service in a previous year, deducted that expense, and received a tax benefit or credit.
You must report the amount in tax benefits or credits for the previously deducted medical expense for the year you receive your settlement. But you only have to report that amount. Any extra funds leftover after accounting for the deduction benefit are not counted as income. So, these funds are not taxable in Minnesota.
Physical Symptoms Caused by Accident-Related Psychological Injuries
For tax purposes, settlements received for emotional distress are treated the same as those for physical injuries or illnesses. But you will have to pay taxes on compensation awarded for physical symptoms resulting from your accident-related psychological damage.
For example, you may start experiencing migraines as a result of increased stress after the accident. If the migraines disrupt your daily life, you might seek medical attention.
If you receive compensation for your migraine medical bills in your settlement, you may have to report the amount as income to the IRS.
Designated Lost Wages or Income Amounts
In Minnesota, you must pay taxes on settlement funds received for wages or profits lost as a direct result of your injury or illness.
There’s one caveat, though. You only have to pay taxes on settlement amounts explicitly designated as compensation for lost wages or income. If the court doesn’t specifically say part of your settlement is for lost wages, you may not have to file your settlement as income.
Some Property Loss Amounts
Some personal injury cases may also feature damage to your property. And settlement funds for reimbursement of the following property losses are taxable:
Patent or copyright infringement
Breach of contract
Interference with business operations
In some personal injury cases, the plaintiff must also file a loss-in value claim to an insurance company. For example, you might want to request reimbursement from your insurance company if an accidental fire damaged your home.
Property loss-in-value settlements aren’t taxable unless the payment exceeds the property’s adjusted basis. What is an adjusted basis? It equals the cost of buying the property, plus any improvements made to the property, and minus any deductions for depreciation.
Punitive damages are taxable in Minnesota. If a court awards you punitive damages, you’ll pay taxes on the entire settlement amount before legal fees.
Let Us Win You a Personal Injury Settlement in Minnesota
How are personal injury settlements taxable? You’ll always pay taxes on non-compensatory settlements in Minnesota. Personal injury settlements for compensatory damages are generally tax-free. However, there are exceptions to this rule.
We recommend always speaking to a tax attorney or certified tax accountant before filing your taxes. That way, you’ll know for sure which portions of your personal injury settlement are taxable in Minnesota.
Think you can get a settlement from your personal injury case? Call us today to schedule your free consultation with the best personal injury attorney in Minnesota.