Taxing Your Winnings: What You Need To Know About Taxes And Your Settlement

If you were injured in an auto accident and won a settlement, one thing to consider is whether or not any money you received is considered taxable income. There are many different factors that determine whether or not the government will collect a portion of your settlement. You will need to work with a personal injury attorney to make sure the money you get is free from taxes as much as possible. The following should be considered when it comes to your settlement:

Taxing Your Personal Injury Settlement

In general, the money you get from a personal injury settlement is not subject to taxation. This includes cases that were both settled in and out of court. It is not considered a part of your gross income, no matter what you decide to use it for.

Possible Exceptions of Taxation

Although your settlement money is not subject to tax, there are a few exceptions. You will be taxed on any damages that result from a breach of contract that inflicts pain. You should also know that only your compensatory awards are not taxed. Any punitive damages you win will be taxed. Your attorney should request that your compensatory and punitive damages be separated so that they can be taxed accordingly. The IRS will also tax any interest that accrues on a judgment. For example, if you win a settlement but the defendant appeals it, interest will accrue on that money. Any interest you receive can be taxed.

If there are two judgments in your favor, you and your attorney will need to make sure it is clearly written in the settlement agreement which part is for physical bodily damage and what is not. This can include settlement money that is for emotional distress, property damage, and anything else that will be taxed.

Emotional Injuries

Any money you win for emotional distress or injuries are going to be taxed. Unless you are able to prove that you have experienced physical pain, your settlement for this type of injury will be subject to taxation. This can include things such as mental anguish, depression, and the like.

One final thing to keep in mind is that when you win a non-taxable settlement, the IRS can and does occasionally challenge the taxation of a claim. If this happens to you, be sure to work with both your lawyer and accountant to ensure things are worked out correctly. Contact a local law firm for additional advice.