Getting injured in an accident is hard enough without worrying about the IRS coming after you. Hiring a personal injury lawyer who understands the law can help you.
You have just found out that you are getting settlement money from an insurance claim that you made. You are excited because you can finally pay off a few of the bills you acquired when trying to recover from your injuries. As you pay those bills, another worry sets in. You wonder if you are to be taxed on the money that you have been awarded.
Both the state of California and the Internal Revenue Service will impose taxes on personal injury settlements in some cases. There are a few facts you should know when you plan your budget after getting an insurance settlement.
What You Will Need to Pay Taxes On
The type of compensation you have received for your injuries will often determine whether or not you will pay taxes on them.
Punitive Damages
Punitive damages are imposed on a defendant in a court case specifically as punishment for their actions. The court imposes them in situations where a defendant may have acted in an especially irresponsible way.
If a person receives punitive damages, those damages will be taxed by the Internal Revenue Service. It will be considered “other income.”
Compensation for Lost Wages
You pay federal taxes on your income, and you will also pay taxes on money received for lost wages. You are likely to have to pay California state tax as well in this case. The amount of the taxes will be commensurate with your income just as they would have been if you had been able to work for the money.
What You Will Not be Taxed On
According to Los Angeles personal injury lawyer Kirakosian, there are certain kinds of settlement money that the government is not allowed to tax you on.
Pain and Suffering
Pain and suffering is awarded for non-tangible damages such as PTSD or emotional loss. You cannot be taxed on pain and suffering settlements as long as the pain and suffering were related to your physical injuries.
You may be taxed if you received a settlement for seeing a traumatic event in which you were not involved. You may also be taxed if you received a settlement because of something that happened to a close relative.
Compensation for Medical Bills
In many cases, a person who has been injured in an accident will write off their medical expenses on their taxes. If you write off your medical expenses and you receive compensation for them, you may be taxed on the settlement amount. If you did not write off medical expenses for the accident in question, you will not be taxed.
Property Damage
You should not be taxed on the money you have received for damage to your property. You may need to adjust your basis in the property due to your settlement. The basis is the amount of your monetary investment in property for tax purposes.
Getting injured in an accident is hard enough without worrying about the IRS coming after you. Hiring a personal injury lawyer who understands the law can help you.
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