Are Personal Injury Settlements Taxable? Will Uncle Sam Take a Bite of Your Payment?

Personal injury is the most common type of claims filed in the U.S. And while many think that it would be outrageous if personal injury settlements were taxable, the truth is: quite a lot of them are.
Today, our Los Angeles personal injury attorney at Compass Law Group, LLP will spill the beans on which types of personal injury settlements are taxable and which are non-taxable.
The last thing you’d want is to receive less money than you settled for – either before or during the trial – because the government took a bite out of the money that you deserve.

Physical injury is non-taxable

A rule of thumb is that physical injury settlements are non-taxable, while emotional injury ones are typically not excluded from taxation. Needless to say, there are exceptions in both cases.
If you’ve received a settlement in Los Angeles, your compensation for physical injury is not taxable under either federal or California state law. In fact, our best personal injury attorney in Los Angeles note that physical injury settlements are non-taxable regardless of whether you settled before trial or via a verdict.
It must also be noted that as long as you get a personal injury or a physical sickness compensation, such damages as lost wages, lost capacity, medical expenses, pain and suffering, and attorney fees are non-taxable in Los Angeles.

But… there’s an exception

However, as always, there are exceptions to the general rule, and this case is no different. When there’s a breach of contract that contributed to a physical injury or physical sickness, these damages are typically taxable.
You may want to seek the legal advice of a personal injury attorney to find out whether or not a breach of contract applies in your particular case to know beforehand whether your settlement will be taxable or not.

Punitive damages are taxable

A rule of thumb is that punitive damages are taxable. That’s one of the reasons why your personal injury lawyer will ask the judge or jury to separate the settlement into two parts: compensatory damages and punitive damages.
This is done in order to make it easier for you and your attorney to explain to the IRS or state that part of the settlement (compensatory damages) is not subject to taxes.

Emotional injury is taxable

If you’re suing someone for emotional injury only, your settlement or verdict would be subject to taxes. As long as you cannot prove that you were physically injured by the defendant – and thus you’re only suing for emotional distress – your settlement will be taxable, our attorneys explain.

How to avoid taxation

In order to avoid large taxes, an attorney may advise you to file two claims against the defendant who caused your injuries. By doing so, you get a better chance of excluding your settlement from taxation.
However, only an experienced Los Angeles personal injury attorney can tell you whether or not this strategy would apply in your particular case. Also, don’t forget about the statute of limitations in California.
It’s highly advised to speak with an attorney immediately after suffering an injury, as it becomes more difficult to document and prove your injuries with each passing day. Waste no time – call our Los Angeles offices today.

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