Personal Injury Awards and Taxes – What You Need to Know

As you pursue a personal injury case, your focus will initially be on simply recovering funds to cover your medical expenses. However, once you’re awarded compensation, you may begin to worry that taxes will eat into your award amount. Although Tennessee does not have a state income tax, and the law on interest taxing applies only to bonds and stocks, the federal government may still be able to tax your personal injury award. The good news is that, per U.S. law, not all of your award will be taxable, though some may be. Money you recover specifically to pay for medical bills or compensate for lost wages are not taxed. The rest of your award, however, may be at risk.

Physical Injuries and Illnesses

Amounts awarded for physical injuries and illnesses are not taxable, unless the illness was brought on by emotional distress. Causation is key, so make certain that your case clearly states the source of the physical symptoms. Honesty will also be essential, since your case will require you to prove the cause of injuries and illnesses, so you should not claim that the accident caused your illness if emotional distress was the true source.

Emotional Damages

These damages are not taxed if they are caused by a physical injury, such as emotional distress caused by the loss of a limb in an accident. However, if your suit includes any emotional distress claims that are not caused by physical injury, those portions of your award will be taxed. Emotional distress over an inability to go to work not due to a physical injury, for example, would be a taxable award.

Some suits are, by nature, emotional claims, and therefore completely taxable. Examples of personal injury suits which will typically be completely taxable due to their emotional distress basis include discrimination and sexual harassment. Because there is no physical injury in the majority of these cases, the resulting awards are generally taxed as income.

Interest

If you do not receive your settlement immediately after the trial ends, the award amount will gain interest until it is paid out to you. While the money is not in your control, it has been awarded to you and so the interest gained is taxable.

You probably hope that your award will be paid out sooner rather than later, but that will not necessarily save you from paying tax. Particularly in the case of large awards, you may choose to deposit the money into an interest earning account. Any interest earned on the settlement is taxable, even if the original settlement was not.

Contact an Attorney

If you want to ensure that you understand the tax implications of your personal injury award, it is best to speak with an experienced personal injury attorney. The Nashville personal injury attorneys at Calhoun Law PLC will be able to advise you so that you save enough for tax time, and can even help you to structure your case to avoid excess tax if you have not yet filed. Contact us today to schedule a consultation.

Resource:

tn.gov/revenue/taxes/hall-income-tax.html

https://www.calhounlawtn.com/extreme-fun-or-accident-waiting-to-happen/