The Mn Criminal Defense, Personal Injury & Family Law Blog
Can the IRS Levy a Personal Injury Settlement in Hutchinson, MN?
August 17, 2021
If you or your loved one has received compensation after settling a personal injury lawsuit, you may have several questions on your mind. You may be asking, Can the IRS levy a personal injury settlement in Hutchinson, MN? The short answer is yes, it can be taxed by the Internal Revenue Service (IRS), depending on what kind of compensation it is.
Including the compensation in your income depends on the unique facts and circumstances surrounding your case. Experienced personal injury lawyers in Hutchinson, MN 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.
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 a 1099 claims submission to the IRS, the federal government will always have access to your settlement details.
Non-Taxable Personal Injury Settlements
The non-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.
The above only applies to Federal taxes on your settlement. In Minnesota, you generally have to pay taxes on any settlement amount received for reasons other than recompensating your medical bills and some property losses.
Loss of quality of life, pain and suffering, and psychological conditions resulting from accidents or accident-related injuries are also non-taxable. Most other personal injury settlements are taxable, either by the state or the Federal government.
Taxable Personal Injury Settlements
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.
In Minnesota, the judge must designate part of the settlement for income replacement. If part of the settlement isn’t explicitly set aside for income replacement, the state can’t tax the amount.
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.
Sometimes, a court may allow the defendant to pay out the settlement in installments. If any interest also gets tacked onto the settlement, that interest is 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.
Wrongful Death Settlements
Taxing compensation received in wrongful death cases depends on state law, and is slightly more complicated. Personal injury lawyers win wrongful death settlements for the heirs of the victim. The state of Minnesota generally doesn’t tax these amounts. That’s true whether the sum is awarded during settlement or if the jury awards it at the end of a wrongful death trial.
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.
Types of Personal Injury Lawsuits in Hutchison, Minnesota
By now, you may be wondering: can I win a non-taxable personal injury settlement in Minnesota? With the help of a seasoned Hutchison personal injury attorney, you’re entitled to settlement amounts for the following situations.
Shared Fault Lawsuits
In some jurisdictions, the party that’s at fault for an accident can’t claim damages for his or her injuries. Minnesota is different. That’s because Minnesota has a shared fault rule, meaning that any party can file for damages as long as he or she was less than 50% responsible for the accident.
The amount of settlement money you receive will depend on what percentage of the accident was your fault. For example, imagine that your total damages in a workplace injury suit totaled $100,000, but the court found that you were 49% at fault for the accident that caused your injuries. Your ultimate settlement payout would then be 49% of your total damages or $49,000.
Vehicular Accident Injury Lawsuits
Some car accident injury victims can recover losses in court. However, the victim must accumulate more than $4000 in medical expenses directly related to the accident. Or the victim must have incurred a disability, injury, or disfigurement that’s permanent or lasts at least 60 days.
Otherwise, you should settle all auto-related personal injury and/or property loss claims with your insurance company outside of court. Minnesota requires all car owners to hold an insurance policy with personal injury protection (PiP). To file a personal injury suit, you must have exhausted your PiP benefits and still have medical expenses leftover.
It’s important to note that you can file an insurance claim even if you were at fault for the accident. And if the accident was less than 50% your fault, you can also file against the other party for damages.
Animal Attack Lawsuits
Victims who develop illnesses or injuries after an animal attack are entitled to personal injury settlements in Minnesota. Minnesota is a one-bite rule state. That means the law holds liable the owner of a vicious animal the first time the animal bites or injures another person.
Any settlement funds a victim wins for his or her medical bills in a dog bite claim are not taxable. If the settlement is explicitly designated for repayment of lost wages, emotional suffering not directly caused by a physical injury, or punitive damages, the amount is taxable.
Workplace Accident Lawsuits
Were you injured on the job? Then you’re entitled to a settlement to cover your medical bills and lost wages. This settlement is called workers’ compensation. Your employer and/or your employer’s insurance company pay out workers’ compensation.
Workers’ compensation used to repay you for your medical expenses isn’t taxable. If a portion of the settlement amount is set aside for lost wages, though, that amount is taxable in Minnesota.
When you and your employer or employer’s insurance company have a dispute about your injury, there are two options. The first is to go to court and fight for the compensation you deserve. The second option is to take a settlement, which is often the less risky and faster option in workplace injury lawsuits.
Personal Injury Lawsuits Against the Government
Minnesota statutes hold government employees liable for any injuries they cause on the job. That means, for instance, that if you’re injured in an accident with a government-owned vehicle, you’re entitled to damages.
Filing personal injury claims against government employees is a different process than regular personal injury claims. Still, victims won’t have to pay taxes on their settlement if the money compensates for medical bills and/or pain and suffering resulting from the accident.
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
Are you asking, Can the IRS levy a personal injury settlement 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 also contact us through our website.
This article was originally written on October 19, 2020 and updated on August 17, 2021.