You don’t have to pay taxes on compensatory damages, but non-economic and punitive damages are subject to taxation.

Hotz & Associates, P.C. offers legal help to those interested in getting the best personal injury settlement possible. To learn more, reach out to us. Until then, we’ve included answers to some of the most common questions about taxes on personal injury settlement claims in Knoxville.

do you pay taxes on personal injury settlements

Are damages in a personal injury case taxable?

Damages are typically exempt from taxes if they’re related to a physical injury. These may include medical bills to treat your injury and lost wages. They won’t necessarily include pain, suffering, and other subjective damages you incurred due to your injury.

However, punitive damages (when a judge or jury awards compensation to deter an at-fault party from future acts of negligence) are taxable. This is because they are legally different from compensatory damages that repay the bills you’ve incurred from your injuries. If you’re awarded punitive compensation with economic or non-economic damages, you must pay taxes on the punitive settlement amount.

IRS codes related to settlement taxes

Federally, all income is taxable, per IRS Internal Revenue Code (IRC) Section 61. However, there’s an exclusion on taxable income from lawsuits, settlements, and awards.

According to IRC Section 104, gross income excludes damages received due to personal physical injuries and physical injuries. Also, taxpayers can exclude the compensatory damages they receive due to a personal injury or physical sickness from their gross income. This means you won’t necessarily have to pay federal taxes on your injury settlement.

However, your compensation due to non-economic losses may be taxable. As such, it must be reported to the IRS.

Also, if you receive punitive damages, you must report them to the IRS. To learn whether you must notify the federal government about an injury settlement, connect with the team at Hotz & Associates, P.C. Get in touch with us today.

What types of injury cases qualify for a tax-free exclusion?

If you were involved in a car wreck, motorcycle accident, or any other incident that led to an injury lawsuit and settlement, you may be eligible for the tax-free exclusion. Your attorney can examine your claim and explain if your settlement may be tax-free.

Is there anything I can do to avoid paying taxes on a personal injury settlement?

A structured settlement annuity may be a good option to reduce your taxes on a personal injury settlement relating to a motorcycle accident or any other type of incident. Instead of getting your settlement money right away, you can work with an annuity provider that pays out your compensation on a schedule. The payment structure lets you get your payout in small installments versus one lump sum. This may help you minimize your tax liability.

In settlement negotiations, you can request that a portion of your medical expenses be allocated as a non-taxable reimbursement. The amount allocated to past and future medical costs is tax-free. Getting this reimbursement may reduce your overall tax burden.

How can I get the best settlement in your injury case?

The team at Hotz & Associates, P.C. can help you out. Our Knoxville personal injury attorney can review your claim and help you request compensation to cover your losses. Contact us online or at (865) 582-0042 for a free consultation.