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Personal Injury Settlement Tax Laws and Exceptions

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When you and your personal injury attorney are attempting to come to a settlement for your case, you’re probably being thrown dozens of numbers. While they all may sound like a great settlement amount, you’re probably not considering how much of that money will actually end up in your pocket.

After you pay your lawyer their fee, your personal injury settlement may still be taxable.

When Is My Personal Injury Settlement Taxable?

If you are receiving monetary compensation from a personal injury case – whether it is through a settlement or from going to court – you will not need to pay federal or state taxes on the money. Because money you receive from the personal injury case is meant to go towards medical bills, attorney fees, lost wages, and emotional distress, it is not taxable.

However, there are some exceptions to this rule.

First, medical expenses will be subject to taxes if you’ve already deducted them on tax returns. Because settlements can time some time to finalize, it is not uncommon that you already would have deducted your medical expenses from previous taxes. If this is the case, that money will then need to be taxed.

If there are any punitive damages involved in your settlement, they will be subject to taxes. The settlement may also be taxed if the basis of the lawsuit is that there was a breach of contract that resulted in your injury. Any interest on the settlement may also be subject to taxes.

It is also important to note that your settlement is only non-taxable if it is for a physical injury. While you may claim personal injury for emotional distress or employment discrimination, your settlement will be taxed unless a physical injury happened.

Where Does Your Personal Injury Attorney Come In?

A personal injury attorney can help you through the entire lawsuit process and can explain your settlement after the negotiations are complete. Your personal injury attorney can also help you recognize which components of the settlement will need to be taxed.

If you are in need of a personal injury attorney or if you have further questions about taxable settlements, contact the Held & Hines, LLP office for a free consultation in either Brooklyn or Manhattan.

Posted in: Personal Injury

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