Do I Owe ANY TAXES From My Personal Injury Settlement or Lawsuit Verdict?
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Today is Tax-PAY day, the day that millions of Americans hurry to the post office in the age-old tradition of filing taxes right at or on the April 15th deadline, IF they owe. The rest of the American public has long ago filed their return early, if they are getting refund!
The question almost always arises from our current and prospective clients as to what their tax liability is for a settlement or lawsuit victory.
Although the correct way to deal with any questionable tax situations is to visit a qualified tax professional or accountant, the chart below is an excellent starting guide on what areas, if any, a person can expect to owe taxes as a result of settlement or trial. The Federal law regarding damages obtained in a settlement or trial changed in 1996, and many of the changes have not been tested yet in a Tax Court.
Here is the chart for your reading pleasure:
|
|
Taxable |
|
Type of Recovery or Settlement |
Yes |
No |
|
Punitive Damages: |
|
Of All Types, Even If Physical injury Is Involved |
X |
|
|
Special Wrongful Death Circumstances |
|
X |
|
Compensatory Damages For: |
|
Emotional Distress (or any other form of mental anguish) |
X |
|
|
Physical Manifestation of Emotional Distress |
X |
|
|
Physical Injuries Accompanied By Emotional Distress |
|
X |
|
Wrongful Death |
|
X |
|
Lost Services of Injured Offspring |
|
X |
|
Serious Emotional Distress Caused By Tortious Physical Contact Where There Is No Substantial Bodily Injury |
|
? |
|
Lost Wages "On Account Of" Physical Injury Or Sickness |
|
X |
|
Lost Consortium Due To Spouse's Physical Injury |
|
X |
|
Bystander Claims of Negligent Infliction Of Emotional Distress |
|
X |
|
Lost Personal, Business, Or Credit Reputation |
X |
|
|
Wrongful Discharge And Other Common Law Employment Tort Theories Without Resulting Physical Injury Or Sickness |
X |
|
|
Medical Expenses Incurred, Including Those Expenses Attributable To Emotional Distress |
|
X |
|
Attorney's Fees Associated With Nontaxable Damages |
|
X |
|
Pre-Judgment and Post-Judgment Interest |
X |
|
|
Interest Component of Otherwise Nontaxable Structured Settlements |
|
X |
|
Interest Earned On Lump Sum Judgments or Settlements |
X |
|
STATUTORY RECOVERIES
Most of the principles on which the above table is based also apply to the taxability of compensatory payments under various statutes listed below:
|
|
Taxable |
|
Type of Statutory Recovery |
Yes |
No |
|
Survival |
|
Worker's Compensation Benefits |
|
X |
|
Retaliatory Discharge Claims/ Filing For Worker's Compensation |
X |
|
|
Supplemental Disability Benefits to Injured Police/Firemen |
|
X |
|
Teachers' Sick Leave Payments |
|
X |
|
Certain Claims For Injury In Federal Government Active Service |
|
X |
|
Age Discrimination In Employment Act (ADEA) |
X |
|
|
Scheme To Reduce Pension Benefits Under ERISA |
X |
|
|
Discrimination Under Civil Rights Act of 1866 (Section 1981) |
X |
|
|
Discrimination Under Title VII of Civil Rights Act of 1964, as amended |
X |
|
|
Americans With Disabilities Act of 1990, as amended |
X |
|
|
Fair Housing, Under Civil Rights Act of 1968 |
X |
|
|
Fair Labor Standards Act |
X |
|
|
Deprivation of Constitutional Rights, Privileges Or Immunities |
X |
|
|
Equal Pay Act of 1963 ("EPA") |
X |
|
|
Texas Commission on Human Rights Act of 1983 |
X |
|
The IRS also has very thorough literature available on its website.
Tax consequences are just another one of MANY reasons why you should hire a Personal Injury Attorney to handle your claims AND draft your settlement release documents.