If you or your loved one has received compensation after settling a personal injury lawsuit, you may have several questions on your mind. One of these may be about whether or not you need to count the proceeds as a part of your income. After all, income can be taxed by the Internal Revenue Service (IRS).
Including the compensation in your income depends on the unique facts and circumstances surrounding your case. As experienced personal injury lawyers in Hutchinson, MN, we understand that the compensation you receive can be made of several elements. For instance, it may include money that makes up for lost wages, emotional/mental distress, and attorney’s fees.
It is also helpful to remember that the IRS will not disrupt an arrangement if it is consistent with the terms of the settled claims.
Before understanding what the IRS can do with your personal injury settlement amount, let’s know the basics
What Is Personal Injury Settlement in Hutchinson, MN?
A personal injury settlement is an agreement that is struck out of court. Both parties involved are required to agree to it. It occurs when the at-fault party or their insurance company offers an amount as compensation, once liability is established.
A settlement is usually reached upon after negotiating in personal injury cases, such as those involving workplace accidents, auto accidents, assault, medical malpractice, product liability, and wrongful death. The compensation can be offered either before or after the case is filed.
Once the victim accepts the compensation, they can no longer pursue their case or take any legal action against or ask for a greater amount from the at-fault party.
More of than not, experienced personal injury lawyers in Hutchinson, MN recommend settling as there is no guarantee that the judge/jury verdict will be in line with the victim’s needs and expectations.
The IRS and Your Personal Injury Settlement
Typically, the proceeds from a personal injury claim are not taxable under federal or state law. This is true of insurance proceeds as well as awards granted by the judge/jury. Because the insurance company makes a1099 claims submission to the IRS, the federal government will always have access to your settlement details.
Thenon-taxable rule applies to victims who have suffered physical injuries. This means a personal injury settlement that is meant to compensate for things like lost wages, medical bills, emotional distress, pain and suffering, loss of consortium, and attorney fees are not taxable as long as they are a result of a personal injury or a physical sickness/illness. Any compensation received for emotional distress, where no actual physical injury is involved, will be taxable.
You should also know that the IRS will tax your personal injury settlements if the amount received is meant to replace your income. If the settlement does replace your income (for example, in cases of employee discrimination where compensation is received for lost wages), the claim can be taxed.
If you include injury-related medical expenses in your previous year’s tax return for a deduction, the award meant to reimburse these expenses may also be taxed by the IRS. This is because you receive a tax deduction for expenses that were paid for with your settlement money.
Wages received, either from your employer or as part of the settlement attract income tax as well.
If your case is based on a breach of contract that caused your injury, the damages received will also be taxable.
It is important to note that any future investment income generated from the money received by the victim is subject to regular investment rules. Further, if an award includes interest, the interest amount is considered and should be reported as income as the money it replaces (the money that may have been earned on the compensatory damages) would have been taxable.
Punitive damages are taxable too since these are meant for punishing the culprit rather than compensating the victim for a loss.
Taxing compensation received in wrongful death cases depends on state law, and is slightly more complicated.
It is best to consult an experienced personal injury lawyer in Hutchinson, MN to gain a proper understanding of the tax rules applicable in Minnesota before negotiating settlements.
How a Personal Injury Lawyer in Hutchinson, MN Can Help You
Working with a skilled personal injury attorney can be beneficial in several ways. Your lawyer will be able to explain to you the tax implications of your settlement, from the commencement to the conclusion of the negotiations. If your case involves more than one claim, a part of the settlement received may be taxable, while the other might be completely non-taxable. An experienced personal injury lawyer in Hutchinson, MN will help you differentiate between the awards and keep them separate. Even if the IRS challenges your non-taxable settlement verdict, having a competent attorney in your corner will be helpful in preventing it from becoming taxable.
More often than not, the IRS does not levy taxes in personal injury settlements as they are not considered income. However, depending on your case facts, it is important to know of the important exceptions that may apply. It is always a good idea to be aware of whether or not your settlement will be taxed, how it will affect the total amount of compensation, and how much money you will receive at the end of it all. Working with an experienced personal injury lawyer in Hutchinson, MN is always recommended so you can make well-informed decisions that work for your case.
Consult an Experienced Personal Injury Lawyer in Hutchinson, MN
The team of experienced personal injury lawyers in Hutchinson, MN at Carlson & Jones, P.A. is adept at resolving complex legal issues like taxes levied by the IRS on the settlement amount. We will offer strong representation and fight to maximize the non-taxable component of your award. Call us on (855) 663-7423 for a free, no-obligation consultation of your case. You can alsocontact us through our website.