If you’ve received a settlement or jury award for a personal injury or are anticipating one, it’s important to know how those funds will be affected by Uncle Sam’s tax code, now that tax filing season is in full gear.
We’ll talk about it in this issue.
What The Tax Code Says About Personal Injury Awards & Settlements in General
Section 104 of the U.S. tax code houses all the “whereas” and “therefore” legal tax requirements related to personal injury awards and settlements.
Up until 1996, the majority of settlements and awards from personal injury cases were considered to be tax-free. Until then, just about anything – emotional distress, defamation, invasion of privacy, etc. – qualified as being tax-free.
But changes made in 1996 made the distinctions that only awards or settlements for physical injuries or physical sickness would qualify for the tax-free status.
Simply put, personal injury awards or settlements meant to compensate you for things like medical bills, lost wages, loss of consortium, emotional distress, pain and suffering and lawyer fees are tax-free.
The physical sickness qualifier refers to instances of sickness being the claim for your injury. For example, if you became sick after being negligently exposed to a germ, damages you recover from that illness would be tax-free.
Exceptions That Will Make Your Award or Settlement Taxable
As with just about any law, there are exceptions – and Section 104 is no different. There are a few things that can make your award or settlement taxable.
- Interest on the award or settlement
In most states, there are court rules that will add interest to the verdict for the entire time the case has been pending.For example, let’s say you filed a personal injury suit on Jan. 1, 2015. You win the case on Feb. 3, 2016 but the defendant appealed and didn’t pay you until Dec. 3, 2016. You’d receive interest on the nearly two years of the amount of the unpaid verdict. - Awards or settlements for emotional injury only
Again, the key is that your award or settlement will remain tax-free as long it arose from being physically injured or becoming physically sick.
If you file a claim for emotional distress but haven’t experienced an actual physical injury, your award or settlement will be taxable.
If You’ve Been Hurt By Someone Else, Call The Fitzgerald Law Firm
We’ll investigate your case and aggressively pursue compensation to help cover medical treatments, in-home care, rehab, surgery and other needs.
The first consultation is always free, so call The Fitzgerald Law Firm at 800-323-9900.