Scenario: You’ve been injured in an accident, you’ve gone to court and have been awarded a settlement. The question that arises, however, is whether you are entitled to all of this money or will you have to pay taxes on it? Additionally, if they are taxable, what situations make them taxable?
For the most part, according to the IRS, personal injury settlement money is not taxable if the money is paid to you after a physical injury or sickness occurs. This stands true as long as you don’t file a deduction for the medical bills on your taxes.
There are instances, however, that will require you to pay taxes on your settlement. For the most part, these include when the settlement replaces your income. Two such examples are income replacement and medical deduction replacement.
If you received your settlement in order to replace income (for example, from a loss in business claims or discrimination through employment), your settlement may be taxable. In this instance, the settlement is taxable. If you’re concerned that your settlement could be taxable, it’s in your best interest that you seek out an attorney for legal counsel immediately.
In the event that you itemize your tax return for medical expenses and are reimbursed for your medical bills in your settlement, this money would be taxable. According to the IRS, you’re required to report any settlement money that reimburses medical expenses “as ‘Other Income’ on line 21 of Form 1040.”
So, the short answer is…usually no, personal injury settlement money is not taxable. However, if you’re concerned in any way, you should contact an experienced personal injury attorney, like R. Mack Babcock, in your area.
If you live in Denver or Colorado, contact us for a free consultation. You can find out more information about personal injury claims, as well as our other practices areas by visiting our blog and knowledge center.