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Taxing Your Personal Injury Awards

If you have been injured in an accident that was caused by someone else’s negligence or irresponsibility, you have the right to file a personal injury claim and seek damages and restitution for your pain and suffering and any related expenses or financial burdens. Personal injury awards can significantly help an injured person stay afloat in a sea of medical bills, repairs, therapy and rehabilitation costs, lost wages and more.

But tax season is almost upon us, and many injured people don’t realize that they may have some tax responsibilities when they receive their case settlements. Below, we discuss how your personal injury award may affect your income taxes.

Medical Coverage

Every personal injury award involves some kind of reimbursement for the medical expenses related to your injury. If you were in a car accident and broke your leg, your ambulance ride, x-ray costs, hospital bills and rehabilitation expenses are all included in your personal injury award. As such, this portion of your award is not taxable, unless you deduct these expenses on your tax return.

If you receive a personal injury settlement and you don’t include itemized deductions for your medical expenses in the previous years for your related medical expenses, your full settlement amount is nontaxable, according to the IRS. However, if you do deduct part of your settlement for the medical costs in a prior tax year, you have to include that deducted portion as income.

Typically, compensation received for emotional distress is handled in the same way as medical expense reimbursement, but any portion received for emotional distress that was not caused by a personal injury must be included as income on your taxes. 

Lost Wages

If you’re getting medical attention or recovering from your injuries, there’s a good chance you’re unable to go to work. For many people, lost wages can be life-changing, even for a short period of time, so those financial drains are recoverable in a personal injury claim. In an employer-related claim, the “lost wages” portion of your award is treated as taxable income and should be reported.

Property Damages

Most personal injury claims involve some element of damaged property: a car accident, damage done to your home or business or others. Compensation for damaged property is a nontaxable amount because this portion of the award is meant to replace the property to the state it was before your accident.  For example, after a car accident, property damage awards can be used to fix your car or purchase a replacement. These awards are not considered taxable income.

Seek Advice and Legal Guidance

As always, tax law is confusing and each part is contingent on your prior actions. It’s best to go over your settlement details with your attorney and a tax professional and work through the best method for filing your taxes. Your personal injury award is intended to help you handle the fallout from an accident or injury without forcing you into financial ruin, so don’t let tax laws and regulations contribute to your money problems. For more information on personal injury claims and awards, contact the Denver injury lawyers at Levine Law today.

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