You’ve been injured in a slip and fall accident, a car accident, or another serious event. Fortunately, you worked with a great personal injury lawyer and you were able to collect compensation for your losses. The next question is whether you have to pay taxes on your settlement. It’s a complicated question, but you want to make sure that you handle your taxes properly.
According to the IRS, settlement awards as a whole are not taxable — but there are several exceptions for individual components of an award. Usually, a personal injury settlement is not taxable, but depending on the reason for the recovery and the way you reported losses in years past, you may have to pay taxes.
Physical Illnesses and Injuries
If you receive a settlement for physical injuries or illness, generally it’s not taxable. However, if you took a medical deduction on your taxes in a previous year, you need to include the income to the extent that you must pay the government back for the benefits that you received in years past. You should report the value of the benefits under other income.
Emotional and Mental Distress
Payments for emotional and mental distress are more complicated. If you’re paid for distress that results from an injury or illness, the payments aren’t taxed. However, if the payments don’t result from an injury or illness, they could be taxable. There’s another exception: If you have medical bills because of your distress, you might deduct them from your taxable payment.
Lost Wages and Profits
Payments for lost wages and profits are generally taxable. You also have to pay Social Security taxes and medical expenses for the year that you receive the payments. It’s important to work with an estate lawyer Sacramento relies on to make sure that you handle taxes properly whether your payments are for wages or for lost self employment.
Punitive damages are generally taxable regardless of the reason that you receive them. You must report them as other income. In addition, interest on a settlement is taxable, and you’ll need to report this as interest income. You also need to make estimated payments in many circumstances. If you don’t pay the correct amounts, you may have to pay interests and penalties.
Health Insurance Subsidies
Another thing to think about when you receive a personal injury settlement is your health insurance subsidies. Before your settlement, your income might fall into a bracket that qualifies you for more insurance subsidies. After your settlement, you might not qualify for as much. It’s important to let the health insurance marketplace know if you have a change in circumstances. This can prevent a big surprise when your tax bill arrives and you have to pay for the difference.
Contact An Attorney
It’s important to work with a skilled and experienced attorney on an estate plan. Everyone should have a plan, and that’s especially true if you have received or expect to receive a personal injury settlement. An attorney can help you protect your interests and your family’s interests. You can work on paying taxes properly and making sure that you and your loved ones secure your settlement for the future. Call an attorney today to discuss your case.
Thanks to our friends and contributors from Yee Law Group for their insight into probate practice.