Is The IRS Interested In Your Personal Injury Compensation?
Everyone knows that any money you win, earn, or are given could be subject to taxes. If you've been in a car accident, you are likely owed compensation, and that could mean money. It's important for accident victims to know what to expect when it comes to how the IRS treats that compensation. For example, if you know you have to pay taxes on a given settlement, it would make sense to ask for more money to account for that loss. Tax issues are not simple enough to provide blanket assurances about personal injury winnings and taxes. The below information is meant to be general and you should consult with both a personal injury lawyer and a tax expert to get the facts as they pertain to your individual case.
A short explanation of the legal term "damages" is needed because some categories of damages are taxed and some are not. Damages are losses from personal property, medical expenses, lost wages, and more. Each of the below forms of damage can be equated to dollars and cents. In the case of pain and suffering, that form of damage may be based on the dollar amount of medical expenses. That is because the more serious the injury, the higher the cost of medical care and the more likely a victim is to be impacted by the injury. If you know how a particular form of damage is treated when it comes to taxes, that might help you when you ask for a settlement.
Is It Taxable?
- Lost Wages – Most accident victims have to miss work to attend to their medical needs. If the victim used paid time off, they are also entitled to be reimbursed for that. Since this form of damage is to cover an expense that would normally be taxed as income, it will likely be considered taxable
- Medical Expenses – Any compensation paid to a medical facility or doctor as a result of the accident is not taxable. However, you cannot use those expenses as a deduction on your tax return if you haven't paid the expense.
- Punitive – This form of damage is not always called for. Only the judge and jury can make a determination of punitive damages. This monetary compensation may be ordered when the other driver was not just careless but negligent. For example, the driver was texting and distracted when they hit you. Unfortunately, this particular form of damage may be taxable.
- Pain and Suffering – Often, pain and suffering damages are many times greater than medical expenses and may make up the bulk of compensation. Fortunately, no taxes are owed on pain and suffering payments.
- Interest – If your case has dragged on for months, some judges order the other side to pay interest on the lawsuit winnings. If so, you will probably owe taxes on the interest.
Speak to a personal injury or car accident lawyer to find out more.