Is a Personal Injury Settlement Considered Income? – Know When to Pay Taxes!
One of the most common questions that the affected parties have when pursuing personal injury claims or lawsuits is: Is a personal injury settlement taxable? This is because the Internal Revenue Service (IRS) has strict guidelines that everyone must follow to ensure that they pay their taxes and avoid penalties.
Schuerger Shunnarah Trial Attorneys have extensive experience handling claims and lawsuits. They understand that each personal injury case is unique and provide personalized consultation to the injured victims. They can help consult on writing a reply letter to too-low settlement offer.
Those who have suffered injuries in Dallas, Texas, should reach out to them to discuss their case and benefit from their legal expertise.
Is a Personal Injury Settlement Considered Income?
Under federal law, personal injury settlement is not considered an income, as it is an amount received by the affected party to compensate them for the damages incurred. Since it is not a personal income and a one-off payment, the IRS will not come to take a portion of the claimant's funds.
However, some portions of the personal injury settlements are taxable because of the exemptions allowed under federal law.
Are Personal Injury Settlements Taxable in Dallas, Texas?
If an injured party suffers personal physical injuries leading to economic and non-economic damages, the IRS will not collect taxes on the settlements.
As long as the damages are tied directly to the victim's injuries or physical sickness, the IRS will not tax the compensation received for medical expenses, attorney's fees, pain and suffering, emotional distress, and other non-economic damages. This is because Texas does not have personal income taxes.
However, there are certain exemptions to the federal tax laws. The injured victims may have to pay taxes on a portion of their personal injury settlements. Schuerger Shunnarah Trial Attorneys can explain exactly how personal injury settlements are paid out in Texas.
What Are the Exemptions Under the Federal Tax Law Pertaining to Personal Injury Settlements?
Under federal law, when filing a personal injury claim, lost wages are subject to taxes. An injured victim can only recover the net after-tax amount of their lost income.
Another exemption under federal law pertains to punitive damages. These are additional damages awarded by the court to punish the defendant for their grossly negligent actions. The IRS requires the injured victims to pay taxes on punitive damages since they are separate from compensatory damages.
In some personal injury cases, the court may award interest income, with the interest accumulating from the date of filing to when the defendant disburses the total compensation payment.
It is essential for all the injured victims to remember that when they're pursuing only non-economic damages without incurring any personal physical injuries, the settlement amount is subject to taxes.
However, the amount recovered is non-taxable if the affected party's emotional distress is closely tied to physical injuries.
A person suffering from post-traumatic stress disorder from a dog attack, for example, will have to pay taxes for the compensation they recover since they haven't sustained any physical injury.
Non-economic damages are non-taxable (unless they're not linked with a physical injury) under federal law, as they help make the injured party "whole" again.
Tax Deductions on Medical Expenses Might Be Taxable
The rules pertaining to taxes on personal injury settlements can be more complicated than one may think. Under certain conditions, Texas allows tax deductions on medical expenses.
If an injured party took an itemized deduction for their medical bills, they may have to declare the amount as taxable income once they receive the compensation.
Below is an example to help illustrate how the IRS taxes itemized deductions following a personal injury settlement:
Sarah takes a $5,000 tax deduction on her medical bills and recovers $50,000 from the negligent party's insurance company after successfully pursuing a personal injury claim.
In the example mentioned above, Sarah will have to declare $5,000 as taxable income for the year after receiving compensation, which means she will have to pay taxes on the amount she received from the medical expenses-related tax benefit according to the state and federal tax laws.
Are Taxes Applicable on a Wrongful Death Settlement in Texas?
Under the Federal Register, IRS Rule 1.104-1, the government treats a wrongful death settlement as part of an accident claim or a personal injury lawsuit. The law does not define such settlements as income, which means they are non-taxable in Texas.
The same exemptions in the federal law mentioned earlier may apply to a wrongful death settlement. Anyone who loses a loved one may have to pay taxes on punitive damages, emotional distress, and accrued interest once they recover the compensation from the at-fault party.
Are Property Damages Taxable in Texas?
When a claimant files a personal injury claim or lawsuit, they may also be looking to recover property damages if they've incurred any due to the at-fault party's actions.
Property damages may include repairing or replacing a vehicle damaged in an accident. In such situations, the affected party does not have to pay taxes on the property damages they receive after successfully recovering compensation.
However, if the recovered property damages exceed the actual cost of acquiring the property, the law considers it taxable income. The affected party must pay taxes on the excess funds.
How Can the Injured Parties Report Settlement Income on Their Taxes?
In most cases, there are no taxes applicable on a personal injury settlement in Texas. However, if an injured party receives a taxable court settlement, they must fill out Form 1099-MISC (miscellaneous income) and report it in their tax returns.
If they're unsure how to go about it, it's crucial that they consult with an experienced tax preparer.
How Can a Personal Injury Lawyer Help an Injured Victim in Dallas, Texas?
Schuerger Shunnarah Trial Attorneys are a reputable team of personal injury lawyers who have helped recover millions of dollars in compensation for injured victims in Dallas, Texas. They can not only offer legal guidance and help pursue civil action but also assist in filing separate claims to maximize tax benefits.
Schuerger Shunnarah Trial Attorneys Can Help Injured Victims Navigate Their Claims and Lawsuits in Dallas, Texas!
Those who have suffered injuries due to another's negligence in Dallas, Texas, should call to schedule a free consultation with Schuerger Shunnarah Trial Attorneys. They can help evaluate their personal injury case and discuss the available legal options while guiding them on the tax implications.