2 important points about taxes and an injury settlement

2 important points about taxes and an injury settlement

| Sep 9, 2019 | Automobile Accidents, Personal Injury

Receiving a personal injury settlement is a great feeling because you have accomplished what you set out to do with your personal injury case in California. However, receiving a payment does not necessarily mean you get to keep all that payment.

As with pretty much any money you receive, the government wants its share in the form of taxes. Personal injury settlements are a little different than earned income, so it helps to become familiar with the tax liabilities you may face. Here is a look at two things to keep in mind about your settlement and taxes.

  1. Some money is tax-free

Some of your personal injury settlement money may be tax-free according to Forbes. Some of the amount you receive for compensatory damages may not be subject to tax. However, other damages you receive are taxed. This includes interest and punitive damages, which are damages the court makes the other person pay as a punishment for whatever led to your injury.

  1. Some compensatory damages are not tax-free

You may think as long as you receive compensatory damages that you are free from tax liability. That used to be true, but recent changes in the law mean that any compensatory damages awarded to you for injuries that are not physical are now subject to taxation. The new law excludes money paid for emotional stress; physical side effects of emotional stress are not physical injuries and therefore face taxation.

This is a confusing topic. The new tax laws only make things more confusing. The exception to the tax-free compensatory damage law can be very tricky to understand. It often takes a professional to figure out what money is taxable and what is not because the distinction can be very minor in some cases. The main thing to keep in mind is that you may have to pay taxes on your personal injury settlement, so be ready to do so.