How To Pay Taxes On A Personal Injury Settlement: Things You Need To Know.

Taxes are something that every individual has to deal with, and they can be especially tricky when it comes to income from personal injury settlements.
Pay Taxes On A Personal Injury Settlement | Garcia Phan Attorney

Taxes and personal injury settlements are both essential but often confusing topics. Taxes are something that every individual has to deal with, and they can be especially tricky when it comes to income from personal injury settlements. This blog post will check what you want to recognize about taxes regarding personal injury settlements.

The tax implications of personal injury settlements vary, depending on the kind of agreement you receive. It means that you will need to file the settlement quantity for your tax return, and you would possibly need to pay taxes on it. Generally, however, personal injury settlements are taxable income.

Reporting your P.I. Settlement

How you report the settlement depends on the type of settlement you receive. Generally, there are two types of personal injury settlements: compensatory and punitive.

The compensatory settlement compensates you for your injuries. They’re not taxable.

A compensatory settlement is an agreement between the injured party and the negligent party at fault. It essentially allows the injured party to get the compensation they deserve. It means that the injured party will receive money damages that cover all of their injuries.

Punitive damages are a way to reprimand the person who has caused the injury. They are not meant to compensate the injured person but to deliver the message that this behavior is unacceptable. Punitive settlements are awarded as punishment to the defendant and are taxable.

Punitive damages are not common in personal injury settlements, but they can get awarded in cases where the injuries are particularly severe.

There are a few exceptions to the taxes typically levied on personal injury settlements. The most common exception is when the victim has sustained physically injured due to the accident. In this case, the damages received from the payment are not taxable. Another exception applies when the victim has experienced significant emotional trauma due to the accident. It can be because of Post-Traumatic Stress Disorder (P.T.S.D.) or a few different forms of mental injury. In this case, the damages obtained from the agreement also are not taxable. We will discuss this subject matter in a bit.

In addition, you may deduct certain costs associated with the agreement. For example, if you had to hire a lawyer or pay medical bills due to the injury, you may be able to claim those costs as deductions. Be sure by speaking with a tax specialist to learn more about filing your taxes for injury settlements.

Taxable and Non-Taxable damages

Two types of damages get awarded as part of a personal injury settlement: taxable and non-taxable.

Taxable damages are considered income and are therefore subject to income tax. The common types of taxable damages are lost damages and medical treatment-related expenses. These damages are taxable because they get deemed supplemental income or income received and regular wages.

Non-taxable damages, on the other hand, are not considered income and thus are not subject to income tax. The most common types of non-taxable damages are pain and suffering, emotional distress, and punitive damages. In addition, injuries received as restitution for a crime are also not taxable.

Further, you will only pay taxes on the received money if the settlement gets paid in installments.

How to pay taxes on Personal Injury settlement?

If you receive a personal injury settlement, below are some things you need to do to pay your taxes.

  1. First, you need to determine the amount of your taxable income. It is the portion of your settlement that is considered taxable income.

  1. Second, you need to file Form 1040 and report the taxable income on that form.

  1. Finally, you need to pay taxes on the settlement amount. You may be able to deduct certain expenses related to your injury from the total taxable income, such as medical expenses.

Garcia & Phan Southern California Personal Injury Lawyers offer free case evaluations. Our team of expert and experienced attorneys will help you with your queries and any question you might have regarding your claim. Give us a call today at 714.586.8298 to get legal expertise regarding your claim with one of our experienced attorneys.


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