An Overview of Taxation of Personal Injury Awards

A settlement that stems from physical injuries includes both taxable and nontaxable damages. For example, if you fracture a limb in an auto accident, some of your damages are taxable, while others are nontaxable. 

Below are some of the taxable portions.

• Interest. If your injury case takes a long time, the defendant owes you both the original compensation and its interest. You pay tax on the interest portion.
• Punitive Damages. Intentional acts or gross negligence may attract punitive damages, which are taxable.
• Mental and Emotional Injury. Physical injuries sometimes cause mental and emotional injuries. For example, a graphic accident might lead to anxiety or even depression. You pay tax on the relevant damages.
• Lost Income. Lost income typically forms a significant part of personal injury damages. The government taxes lost income with the rationalization that you would have still paid tax on your regular income without the injury.

There is also a breach of contract to consider. A breach of contract, which is a form of product liability, can cause physical injuries or illness. Consider a case where a vendor sells you electrical equipment with the promise that they are safe for outdoor use. You have a breach of contract claim if moisture affects the equipment, and you suffer electrocution. According to enjuris.com, you owe taxes on your breach of contract award.  

Below are the non-taxable portions of your physical injury award.

• Medical Bills. All medical bills, including diagnostic, treatment, and equipment bills, are nontaxable. However, your medical bills become taxable if you include them in your tax deductions.
• Pain and Suffering. Pain and suffering damages compensate for the pain and discomfort that come with physical injuries. Examples of pain and suffering damages include loss of consortium, physical pain, and emotional pain. These damages are nontaxable.
• Legal Lees. Personal injury lawyers typically work on a contingency basis and take a percentage of the award. For example, you may agree to pay your lawyer 35% of your award as legal fees. In such a case, the 35 percent of your award is nontaxable.

Also, some accidents cause both physical injuries and property damages. For example, auto accidents usually cause damage to the car and its contents. In such a case, your auto accident settlement should include property damages. The property damage compensation is nontaxable as long as it doesn't exceed the adjusted value of the property.

A physical injury can trigger emotional distress, but you can also suffer emotional injury without physical injury. For example, you might suffer emotional distress if:

• You watch a graphic and fatal accident of a loved one
• Your boss constantly abuses you in front of your coworkers
• A coworker harasses you sexually
• A journalist defames you in a popular newspaper

In all the above cases, you deserve compensation from the liable party. If you win, you owe the government a portion of the award as taxes.

A typical injury case has mixed damages, some of which are subject to tax, while others are not taxable. Wegner & Associates will help you understand which portions of your award are taxable. We can also help you minimize the taxes. If you have an injury case, contact us for a free initial consultation to determine the best way to handle your case.