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Can the IRS Take my Personal Injury Settlement in Los Angeles, Calif.?

When it comes to a personal injury claim, most are settled out of court before or during the trial. After you accept the other party’s settlement offer and sign a release, the case is considered closed. However, after receiving the amount, you will have several things to consider.

Several questions can arise as tax season approaches including “do I owe anything to the IRS?” and “can the IRS take my personal injury settlement?”

To recover the largest compensations and assurance that tax issues will not erode your damages settlements, contact a Huntington Beach personal injury attorney at El Dabe Ritter Trial Lawyers.

Ordinarily, No

Generally, the money received from a personal injury settlement is not taxable as long as it was received because of a physical injury or sickness. The Internal Revenue Service considers the money received due to a personal injury as a replacement for something that has been lost and hence does not count as income. This means that personal injury damages that are supposed to compensate for factors such as lost wages, medical bills, emotional distress, pain and suffering, and lawyer payments are not taxable as long as they are arising because of physical sickness or personal injury.

Settlement for a physical injury, whether resulting from a jury award or settlement and if it’s compensated as a lump or a structured payout, is not considered income. The best way to remember this principle is that the money is not taxed when it first comes to the victim’s hand, whether as an annuity or a lump sum. After receiving the money, the cash’s future investment income is treated in a similar way to any other investment.  

There Are Always Exceptions

If the injury is emotional and not physical, the settlement is taxable.  Also, in an employment discrimination case where the settlement received is for lost wages, it is considered taxable income. This means that if your emotional distress does not arise from physical injury, it may be considered other taxable income.

Punitive damages are also taxable. This is because they are aimed at punishing the defendant rather than serving as direct compensation for the complainant’s loss. In the case of punitive damages claim, your attorney will ask the judge to make a separate verdict of punitive and compensatory damages. This will enable you to indicate to the IRS that a particular portion of the verdict is compensatory damages and should not be taxed.

Another taxable element in the personal injury lawsuit is the interest on the judgment. In many states, the court adds interest to the settlement verdict for the time duration that the case was pending. You should receive interest on the verdict from the date you filed the lawsuit until you receive the settlement amount. The interest is paid on the amount of the unpaid verdict and is taxable.

Factors to Consider When Filing Taxes

If you are still confused about owing taxes on your personal injury settlement, here are some things to keep in mind:

  •       Interest
  •       Lost wages
  •       Loss-in-value of property
  •       Punitive damages

For further clarity about the clarity you deserve, contact the experienced personal injury lawyers at El Dabe Ritter Trial Lawyers to schedule a free consultation and learn your legal options.