In most cases, compensation for personal physical injuries or physical sickness is not considered income under federal law. That said, certain portions of a settlement, like interest or lost wages, may be considered taxable income.
It’s important to know when a personal injury settlement is considered income, so that you and your New Hampshire personal injury lawyer can properly structure your settlement by identifying what allotment is for which damages.
When is a personal injury settlement considered income for taxation purposes?
Personal injury plaintiffs in New Hampshire are entitled to compensation for their economic damages (medical bills, property damage, out-of-pocket expenses) and non-economic damages (pain and suffering, emotional trauma).
In some states, courts award punitive damages. However, New Hampshire doesn’t recognize traditional punitive damages, though certain enhanced damages may apply in limited circumstances.
If you receive a settlement, you will likely have to pay taxes on:
- Lost Wages: This is the income you didn’t earn because you were too badly injured to work. This is taxable, as it replaces the taxable income you should have earned (but didn’t).
- Punitive Damages: Punitive damages (which are not generally available in New Hampshire but may arise in other jurisdictions) are almost always taxable.
- Interest: If there was a significant delay between filing the claim and receiving your settlement, your settlement may include interest. This is listed as “interest income” on your federal tax return.
- Emotional Distress and Mental Anguish: Emotional distress damages are taxable unless they directly result from a physical injury or physical sickness.
- Loss of Future Earnings: Just as the compensation for your actual lost wages is taxable, so is the loss of earning potential. The IRS figures that since this is taxable income you would have earned, you must pay taxes on it.
What part of my personal injury settlement is not considered taxable income?
Medical Bills: Section 104(a)(2) of the Internal Revenue Code states that compensation for bodily injuries or illness is not taxable.
Property Damage: If the compensation for your damaged vehicle, phone, jewelry, or other possessions does not exceed the adjusted basis of your property, then it is not taxable. However, you may have to pay capital gains taxes if the payment exceeds the property’s adjusted basis.
This is a very broad overview of the tax implications of receiving a personal injury settlement. The reality is much more complicated. It’s best to consult with a tax professional to ensure that you properly report and pay taxes on your settlement.
Do I have to report a structured settlement to the IRS?
In many cases, payments from a structured settlement for physical injury are not taxable, but interest or investment components may be. There are different tax implications with a structured settlement, although the full amount of damages awarded for physical injury or physical sickness is not taxed at the federal level.
How can a personal injury lawyer help address tax concerns in a settlement?
The wording of your settlement assigns specific amounts to specific damages: medical, lost wages, pain and suffering, etc. Your personal injury lawyer can negotiate with the defense to word the settlement in such a manner that it minimizes your tax liability.
The attorneys at Shaheen & Gordon will work to pursue full and fair compensation based on the facts of your case and structure the settlement to preserve as much as possible.
We offer a free consultation. Please contact us today at (800) 451-1002.
