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Will You Pay Taxes On Your Settlement Or Verdict?


Let’s say that you are injured, and you make a personal injury claim, and you eventually recover compensation, whether through a settlement or through a jury verdict. You pay whomever needs to be paid out of that settlement, and the balance is yours. Except, you may have forgotten one person or thing that still will want their cut: Uncle Sam.

Your settlement or verdict is income, money coming to you. So can it be taxed? The answer is more complex than you may think, but the good news is that your injury attorney can, in some cases, help you manage your settlement in a way that minimizes your tax burden.

Is it Replacing Income?

As a general rule, any payment you get from the other side that would be taxable if you had received that money normally, can be taxed. In plain terms, this means lost wages. If you were never injured, and went to work and made that money, it would be taxed. So, the money you receive to compensate you for those lost wages is also taxed.

Additionally, money you receive to pay your medical expenses is also not taxable. That includes all treatment, not just the emergency care you may receive as a result of the accident.

Emotional and Non Economic Damages

Emotional damages get a bit more complex when it comes to taxes. If your emotional damages-things like pain, suffering anxiety, PTSD, loss of the quality of life, and similar non-economic losses—stem from or flow from physical injuries that resulted in the accident, then compensation for those items is not taxable.

However in some cases someone may have only emotional damages, with no physical injury. Although this is rare, if you do receive compensation for only emotional damages, that part of your compensation may be taxable.

Note that because of this rule, if you ever received a settlement for any kind of lawsuit that only had emotional damages, you would pay taxes on those damages. For example, in discrimination lawsuits, or harassment lawsuits, where there is no actual accident that causes a physical injury, you would pay taxes on those damages.

Taxes on Interest

It gets even more complex, because often, there is interest paid on what is owed to you. The law considered this “extra money,” and thus, even if the base payment (such as for medical expenses) is not taxable, the interest on that money would be taxable.

Specifying Your Damages

Of course, in many cases a verdict or a settlement is not parsed out to divide the money you receive evenly amongst all these categories. With a settlement, it is a bit easier, as your attorney can help word a settlement in a way that clearly states what amount is being paid for what purpose.

Jury verdicts may be a bit more difficult, but even then, a jury form can separate the damages into categories, to make it clear what is and is not taxable.

Call the West Palm Beach personal injury attorneys at Pike & Lustig today for help with your personal injury settlement-or if you need to take your case all the way to trial.



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