If you were injured due to someone else’s negligence, you have likely had to face many challenges, including the decision about how to best pursue a personal injury claim. Obtaining a settlement that extends to all of the damage you now face is critical, but there are also other critical issues to consider. For one, it is essential to make sure that your settlement is structured in such a way to reduce your tax burden. To make sure that as little of your injury settlement as possible is taxed, it can help to speak with a knowledgeable personal injury attorney.
Compensation for Physical Injury
A personal injury settlement is designed to compensate an accident victim for the injuries that they experienced as a result of another party’s negligence. These settlements compensate victims for various types of damages, which can include the following:
- Emotional distress
- Lost wages
- Medical expenses associated with an illness or injury
- Pain and suffering
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Taxes and Personal Injury Settlements
Compensation received as part of a personal injury claim is often not subject to either federal or state taxes. Provided that the compensation received is linked to either an illness or injury associated with a condition, the compensation is not taxable. Some of the most commonly received types of compensation that are not taxed include attorney fees, medical bills, lost wages, property damages, and emotional suffering. Exemptions, however, make this area of law much more complex.
Exemptions to What is Not Taxed
With few exceptions, none of these categories are taxed either under federal or New York law. Some of the exceptions, however, that are subject to tax include:
- If a case involves a breach of contract, any money received from the compensation will likely be subject to taxes. Even if the breach resulted in a physical injury, a claim is more focused on a contract than the resulting physical harm.
- When emotional distress results without accompanying physical injury or illness, damages are likely subject to taxation. This is true whether an individual experiences a purely emotional injury from an accident or emotional distress. The amount of this compensation that is used to treat the emotional distress, however, is often not subject to tax.
- Physical injuries that result from another party’s negligence are often an easily calculated type of damage. Calculating what compensation should be assigned following an illness, however, is often more complex. The law states that the part of a settlement that covers an accident victim’s damages incurred due to another party’s negligence is not taxable, which includes emotional distress as well as pain and suffering incurred as a result of injuries.
- When a person who caused an accident is determined to have acted in a particularly egregious manner, punitive damages are sometimes awarded. These damages are designed to punish the negligent party but are not a common occurrence in personal injury cases. If your case involved punitive damages, it helps to understand that this category of damages is taxed because it is viewed as not directly related to the costs associated with the harm suffered. Instead, punitive damages exist to penalize the party who caused the accident.
- If your damages accrued interest, this interest will be subject to taxes. In situations in which a case is not settled and ends with a verdict, the opposing party may try to appeal the decision. In most cases, interest would begin to accrue beginning on the date that you filed for a lawsuit.
The Impact of the 2018 Tax Reform Law
Signed into law in 2018, the Tax Cuts and Jobs Act had some impacts on how money received as part of a personal injury settlement is taxed. This law made it so that an accident victim suffering from physical symptoms caused by an accident is still required to pay taxes on compensation received as part of a civil action. This is because, due to the law, the Internal Revenue Services now classify symptoms like headaches and stomach pain as the “normal byproduct” of emotional distress rather than strictly bodily injuries. As a result, due to the law, if a person is pursuing compensation for emotional distress as well as anxiety caused by an accident, it helps to understand that a portion of the damages received might be subject to federal taxation.
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Advice on Reducing Taxes Placed on Accident Injury Settlements
If you were injured in an accident and received a financial settlement for lost wages and pain and suffering, you will most likely end up paying some amount in taxes. Fortunately, there are some helpful strategies that you can utilize to reduce the amount of taxes that you ultimately owe. These tips include:
- Consider how damages in a settlement are classified. There are two types of damages when compensation is awarded — general and special damages. General damages include non-taxable pain and suffering, while special damages might be subject to taxes. It is often possible to pay fewer taxes by carefully considering how damages are categorized.
- Remember to inform the health insurance marketplace. If your settlement will result in an increase in your income, remember to contact the marketplace to inform them about this change.
- Structure an accident settlement. If you won a large amount of compensation in a settlement, it is possible to avoid taxes by having funds disbursed to you over an extended period.
- Speak to a tax professional. If you are close to obtaining a settlement or recently received a jury award for a personal injury accident, it can prove beneficial to speak with a tax professional who can review with you the various tax ramifications that you might end up facing due to the award.
Speak With an Experienced Personal Injury Attorney in Long Island
The purpose of personal injury settlements is to compensate individuals after someone else’s negligence caused an accident. To make sure that as little of your settlement as possible is not taxed, it is a good idea to retain the assistance of an experienced Long Island personal injury lawyer. Contact Cohen & Jaffe LLP today to speak with an attorney who has years of experience fighting for the results that accident victims deserve.