Anyone who has been injured through someone’s negligence may be entitled to receive compensation, typically in one or two ways. Either you can settle the matter outside of court or you can file a lawsuit and obtain a legal judgment through the court system. Generally speaking, jury awards in civil lawsuits result in more substantial recovery than a settlement. However, a favorable jury verdict is not always guaranteed. For that reason, as a personal injury lawyer in Joplin can attest, the majority of personal injury claims settle before trial. But the question is whether that settlement will be taxable.
When can settlement occur?
On the whole, settlement will only occur when either the defendant or the defendant’s insurance carrier makes an offer of payment, but only before liability has been established. The offer of settlement can be made before the lawsuit is filed or after the lawsuit has been filed. A settlement can occur before the court dismisses the case. A case could even be settled right before or during the trial, as long as the jury has not yet returned a verdict. In fact, in some cases, a settlement can be reached while the jury is deliberating.
What happens after a settlement?
As any personal injury lawyer in Joplin has experienced, only a small percentage of personal injury cases are tried to a verdict. Once you accept the settlement offer and the defendant has been notified, you just need to wait to receive the settlement proceeds. A common question that many clients ask is whether their settlement award will be subject to personal income taxes. The answer to that question depends on a few factors.
Compensation for a physical injury is not taxable
Generally speaking, settlement proceeds received from a typical personal injury claim are not subject to either federal or state taxes. That is true regardless of whether you settle the case before or after filing a lawsuit or if you went to trial. Under Federal tax law, damages received as a result of personal physical injury or illness are excluded from the gross income of the taxpayer.
Damage awards related to personal injury are also excluded
In addition, damages meant to compensate for lost wages, medical bills, emotional distress, pain and suffering, loss of consortium, and attorney fees are also not taxable, but only if they relate to a claim for personal injury or illness.
Exceptions to the rule
Even if you suffer a physical injury or illness, you can be taxed on any damages that relate to a breach of contract if it as the breach of contract that is the basis of your lawsuit and caused your injury. Also, punitive damages are always taxable. For that reason, a personal injury lawyer in Joplin will typically ask the court or jury to separate the verdict into compensatory damages and punitive damages. That way, it will be easier to demonstrate to the IRS that portion of the award was untaxable for the compensatory damages.
Interest accrued on a judgment is taxable
In some cases, you may also be awarded interest on a judgment for the length of time the case has been pending. The interest that is earned on the judgment is taxable. For instance, if your lawsuit was filed on January 1, 2017, you could be awarded interest on the judgment starting from that date and continuing until the judgment is paid. This can be significant if the case is appealed, for example. All of the tax that accrues is taxable.
Claims for emotional injury only are taxable
Considering the rule that a settlement or judgment is only non-taxable if it arises from a physical injury or illness if your claim is only based on emotional distress or employment discrimination for instance, but no actual physical injury, then your settlement or judgment would be taxable.
A personal injury lawyer in Joplin can help ensure your award is not taxed
In many personal injury cases, there may be more than one claim against the defendant. That would result in a portion of the award being taxable and the other portion being non-taxable. As a personal injury lawyer in Joplin understands, it is important to explicitly state in the settlement agreement that the awards for the two different types of claims need to be kept separate. Although the IRS may challenge your claim that the settlement or judgment is non-taxable, when you specifically allocating your settlement in this way, you will have the best chance of keeping most of the settlement excluded from taxation.
If you have questions regarding taxation of personal injury awards, or any other personal injury issues in Arkansas or Missouri, please contact the Cottrell Law Office for a free consultation, either online or by calling toll-free at (888) 433-4861.
He is licensed to practice law in the United States District Court for the District of Kansas, eastern Arkansas, western Arkansas, and western Missouri. He was Deputy Prosecuting Attorney in Crawford County, Kansas from 1987-1989.
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