If you spend months or even years pursuing a personal injury settlement, you do not want to lose a significant portion of it to Uncle Sam once you actually secure the compensation you deserve. After all, you need those funds to cover the costs associated with treating and managing the injuries you sustained.
Fortunately, proceeds that you recover by filing a successful injury claim are not typically taxable at either the state or federal level. Regardless of whether you negotiated for a settlement or received funds after your case went to trial, neither the Internal Revenue Service nor your state government has the right to claim a portion of your compensation—for the most part.
There are some exceptions to this rule, and it is essential that you understand them before agreeing to a settlement. Otherwise, you could end up losing a significant portion of the damages you collect to the federal government.
If you were hurt in a collision with a negligent motorist and you want to discuss your options for recovering compensation, contact Ballard Law, PLLC. William E. Ballard is a personal injury lawyer in Jackson who will evaluate your case to determine if you have grounds for a claim.
You may be entitled to compensation for medical bills, lost wages, and non-economic damages. Schedule a free consultation by calling 769-572-5111.
When Can the Government Tax a Personal Injury Settlement?
Pursuant to 26 CFR 1.104-1 of the Tax Code, the government does not tax settlements that are intended to compensate accident victims for physical injuries, or emotional distress attributed to a physical injury. Thus, settlements received for economic and non-economic damages are not taxable if the settlement is attributable to a physical injury.
In the state of Mississippi, though, injured individuals are also allowed to seek punitive damages from parties whose actions were egregiously reckless, intentional, or willful. Since punitive damages do not compensate victims for actual costs, they are essentially a form of income, and the IRS will tax them accordingly.
If you recover punitive damages in a personal injury claim, you will need to claim them on your tax return in the Other Income section on line 21 of Form 1040. Additionally, if the punitive portion of the settlement is large enough, you will have to make estimated tax payments every quarter until you file your taxes for that year.
The IRS also taxes interest that accrues on any settlement. You should report any interest on line 8a of Form 1040, under the Interest Income section.
Most personal injury settlements do not include punitive damages; however, if yours does, your lawyer will ask the judge or opposing party to separate the final verdict or settlement into compensatory and punitive damages. This will ensure you do not end up owing taxes on your compensatory damages, as well.
If you were injured by a reckless or negligent driver, turn to Ballard Law, PLLC. Attorney William E. Ballard will gather evidence, interview witnesses, handle correspondence with the insurance company, and help you fight for the maximum compensation.
Call 769-572-5111 to schedule a free case evaluation with an accident attorney in Jackson. If you would like to learn more about motor vehicle collision claims in Mississippi, visit the USAttorneys website.